Banca Monte dei Paschi di Siena has said it will not pay coupons coming due at the end of the month on three hybrid loans, as requested by European authorities as a condition for a state bailout.
Italy's third biggest bank, brought close to collapse by the euro zone debt crisis, is set to unveil a turnaround plan this week. European Union Competition Commissioner Joaquin Almunia has asked the bank to toughen up a previous restructuring plan.
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In a letter sent to the Italian government in July, Almunia had also said that payments to holders of hybrid and subordinated debt issued by Monte Paschi had to be "prevented to the maximum extent legally possible."
Monte Paschi holds a board meeting on Tuesday to approve a turnaround plan to meet the EU demands.
The bank issued a hybrid financial instrument called FRESH in 2008 to partly fund its controversial purchase of rival Antonveneta.
On Friday, Monte Paschi said it would not pay the next coupon on September 30 on its MPS Capital Trust II non-cumulative floating-rate guaranteed convertible FRESH preferred securities.
The bank said it would also withhold the coupon payment on its Antonveneta Capital Trust I and II non-cumulative floating- rate guaranteed trust preferred securities, respectively, on September 21 and 27.
"The suspension of interest payment is permitted, under certain prerequisites, by the respective regulations" of the notes, Monte Paschi said in a statement.
(Reporting by Valentina Za. Editing by Jane Merriman)