Monte dei Paschi was expected to raise its estimate for the loss on derivatives trades that recently came to light and are now at the center of an investigation against former executives at Italy's third-biggest bank.

A source close to the situation said the final loss would be announced Wednesday and should be higher than a preliminary estimate from October of around 720 million euros ($974 million).

The findings of a review of the trades and their impact on the bank's accounts by external consultants are to be submitted to the bank's board, chaired by former UniCredit chief executive Alessandro Profumo.

"In the meeting with the board we will give very clear numbers about these transactions. Tomorrow evening we will have total clarity," Profumo said on Italian television on Tuesday.

Il Sole 24 Ore daily reported the bank would reveal losses of 920 million euros from the three derivative trades, plus a further loss of 120 million in "personnel costs".

"The numbers in Il Sole are not correct," said a source at the bank.

The three derivative transactions are the "Nota Italia" trade with J.P. Morgan in 2006, the 2008 "Santorini" trade with Deutsche Bank , and the 2009 "Alexandria" trade with Nomura <8604.T>.

The loss from these trades will likely lead to a restatement of past accounts and increase the overall 2012 losses for the Tuscan lender, which had already posted a net loss of 1.66 billion euros in the first nine months.

The scandal surrounding the derivatives deals has thrust Monte dei Paschi, which last year requested 3.9 billion euros state aid, to the center of the campaign ahead of national elections on February 24-25.

Sources close to the situation have told Reuters the lender, the world's oldest, had been negotiating with banks involved to restructure or close the deals.

One source said the negotiations with Deutsche Bank were going well while those with Nomura were dragging. Deutsche Bank and Nomura declined to comment.

Profumo and Monte dei Paschi chief executive Fabrizio Viola, who say they discovered the extent of the derivatives deals in October, are keen to clean up a balance sheet burdened by hedging bets gone wrong.

"They want to pull out this painful bad tooth, which is also a drag on revenues, and then there will be no more skeletons in the closet," the source close to the matter said.

RATING CUT

In November, Monte dei Paschi raised its request for state aid by 500 million euros, citing a possible hit from unspecified structured transactions. It has since said that cash buffer will be enough to cushion any loss from the trades under review.

Standard & Poor's last week cut the bank's rating to "BB" - one notch below junk status - because of concern the shortfall might be bigger than anticipated.

"The main concern at this time lies in the potential operating impacts (stability of direct deposits, access conditions to the wholesale market) of the recent events which are causing serious damage to the reputational capital of the bank," said Luca Comi of ICBPI in a report.

Monte dei Paschi can at least take comfort from a fall in the spread between Italian 10-year government bonds and equivalent German Bunds in recent weeks, which is cutting the capital shortfall deriving from a mark-to-market of its huge Italian government bond portfolio.

Mediobanca and Merrill Lynch analysts estimate that shortfall to have narrowed to around 2 billion euros now from more than 3 billion six months ago - although that does not take into account the impact of losses on structured transactions.

Even before the derivatives scandal emerged last month, Monte dei Paschi was being investigated over its costly 2007 acquisition of smaller rival Antonveneta, which stretched its finances to the limit months before the collapse of Lehman Brothers.

In the first nine months of 2012 Monte dei Paschi, hit hard by the euro zone crisis because it has the biggest Italian government bond portfolio relative to assets among Italian banks, reported a 15.6 percent annual fall in customer deposits and securities issued.

The bank also had gross impaired loans worth 28.3 billion euros, representing a higher proportion of total loans than the average for other Italian lenders.

(Editing by Hans-Juergen Peters)