MILAN (Reuters) - Italy's Banca Carige (>> Banca Carige SpA) could sign an underwriting accord with banks for its share issue as soon as Friday, a source close to the matter said, paving the way for the launch of a capital increase needed to safeguard its future.

Carige, saddled with bad loans and accumulated losses, needs the 560 million euro (£500.15 million) cash call to avert the possibility of being wound down by the European Central Bank.

The Italian bank must boost its core capital ratio, which lags the threshold recommended by the ECB, by the end of the year and its share issue is a key plank of a capital plan, which also includes asset disposals and a debt swap.

Carige, which has lost nearly 3 billion euros since 2013, has warned its business could be at risk if the plan fails.

Although some technical details needed to be ironed out, all conditions for the underwriting had been met and Carige should launch the share issue around the middle of next week, the source said.

"The underwriting contract will be finalised this weekend, maybe already tonight (Friday)," the person added.

Carige had hoped to finalise underwriting for the rights issue on Wednesday, but last-minute difficulties meant Credit Suisse (>> Credit Suisse Group), Deutsche Bank (>> Deutsche Bank) and Barclays (>> Barclays) did not commit to take on any unsold shares.

Banca Carige's Chief Executive Paolo Fiorentino has been in meetings all Friday to try salvage the cash call.

Failure to carry out the share issue would undermine confidence in the sector just as risks of contagion seemed to have subsided following a string of bailouts. It could also jeopardise efforts by small lenders to tap investors for cash in order to meet regulatory demands to step up bad loan disposals.

CONTAGION

Carige's troubles have reverberated across Italy's banking sector, hitting in particular Creval (>> Banca Piccolo Credito Valtellinese SpA), which has just announced plans to raise 700 million euros, or more than five times its market value, in a share issue.

Italian banks are saddled with a quarter of Europe's soured loans, a hangover from a deep recession that ended in 2014, and are struggling to offload them as they can only sell at a loss.

Creval shares fell 19 percent on Thursday and closed down 25 percent on Friday. Moody's downgraded its ratings, saying it saw "material execution risk" in the bank's planned share issue.

"If the Carige deal falls apart, Creval's won't work either," fund manager Giuseppe Sersale of Anthilia Capital said.

Carige said late on Thursday that commitments from investors so far totalled around 11.75 percent of capital, or 328 million euros based on Reuters calculations.

On Friday, Malacalza Investimenti, Carige's top shareholder with a 17.6 percent stake, said it would subscribe to the cash call pro quota. The investment vehicle of the Malacalza family has also sought regulatory approval to raise its stake to 28 percent and pledged to support Carige.

Malacalza has invested 264 million euros to build its stake since 2015, when Carige last sold new shares at 1.17 euros each. The stock, which was suspended from trading, last closed at just under 15 euro cents.

Meanwhile, the bank's second largest investor, Gabriele Volpi, committed to raising his stake to 9.9 percent from 6 percent, a source close to the matter said.

The first source added that Carige was set to enter exclusive talks over the planned sale of its bad loan portfolio and its consumer credit unit before the launch of the cash call.

(Additonal reporting and writing by Agnieszka Flak; Editing by Mark Bendeich/Elaine Hardcastle/Alexander Smith)

By Valentina Za and Andrea Mandala