UniCreditSpA is in discussions with the Italian government concerning theterms of its underwriting deal for Banca Popolare di Vicenza SpA's proposed €2 billioncapital increase, theFinancial Times reported March 29,citing "five people with direct knowledge of the matter."

The negotiations center on UniCredit's possible use of alegal loophole that could permit the bank to back out as the deal's mainunderwriter if market conditions worsen, according to four of the sources. Thebank is also seeking the government's assistance in garnering support frominstitutional investors and lenders, they said.

UniCredit's underwriting of the April capital hike is seenas a crucial test of investor confidence in Italian banks, partly because ofthe deal's potential impact on UniCredit's capital buffers, the FT said. Mediobanca analysts reportedlysaid that any concerns about UniCredit's underwriting deal with Vicenza orIntesa Sanpaolo SpA'sunderwriting of Veneto BancaSCpA's planned €1 billion capital increase "could revive systemic risk onItalian banks."