By James Mackenzie and Silvia Aloisi ROME/MILAN (Reuters) - Italy's Monte dei Paschi di Siena (BMPS.MI) will seek 2.5 billion euros ($3.3 billion) in fresh capital from investors to shore up its finances, an amount that is more than double its original plan and makes nationalization more likely should the cash call fail. The world's oldest bank, Italy's third biggest, said on Monday it expected to approve a new, tougher restructuring plan on September 24 to win the green light from the European Commission for a 4.1 billion euro state bailout it received this year. The revised plan, which will include the 2.5 billion euros capital increase to be launched in 2014, is the latest measure in a painful recovery process for the 540-year-old Tuscan lender. Monte Paschi is still grappling with the aftermath of a massive derivatives scandal which emerged in the wake of its expensive acquisition of rival Antonveneta in 2008. The size of the planned capital increase, which matches the current market capitalization of the bank and was announced by the economy ministry late on Sunday, underlines the problems still confronting Monte Paschi. The bank could fall under direct state control if it cannot raise sufficient funds from shareholders. There's no chance on the planet that they can raise 2.5 billion euros on the market within 12 months. They are heading towards nationalization," Giuseppe Bivona, a former Goldman Sachs and Morgan Stanley investment banker who has been advising consumer group Codacons in a series of lawsuits against Monte Paschi, told Reuters. The stock fell 3 percent in early trade to 0.21 euro on Monday. I don't see how the market could take the news well today. It will be difficult to find someone to shell out all that money as it's not an insignificant amount," a Milan trader said. Some analysts said the bank's best option to avoid nationalization could be a debt-to-equity swap, converting subordinated bonds it has already issued into shares. "That would be a hit for bond holders and also for shareholders, but at least it would be fairer on taxpayers and it would be in line with the new bail-in guidelines for banks," said Fabrizio Bernardi, analyst at Fidentiis. European Union authorities that must approve the state loans to Monte Paschi have pressed hard for the lender to step up the size of its capital increase, previously expected to amount to 1 billion euros. Competition Commissioner Joaquin Almunia, who met Economy Minister Fabrizio Saccomanni on the sidelines of a conference in the lakeside town of Cernobbio, said on Saturday that if the capital increase failed, the state would have to convert state aid into bank shares. Monte Paschi has been based in the Tuscan town of Siena since its launch in 1472, and in more recent times has built up tight links with local politicians and businesses which could be thrown into upheaval if the bank came under state ownership. With investors wary about potential problems at the bank, which has announced thousands of job cuts and closed hundreds of branches, it may be hard to attract private money, raising a serious problem for Prime Minister Enrico Letta. Italy, struggling to control its 2 trillion euro public debt and looking to boost revenues through privatizations, can ill-afford to take on additional burdens as a shareholder. But it may end up with little choice. Italy has so far managed to avoid nationalizing any of its banks in the wake of the financial crisis but it has faced heavy pressure from organizations including the International Monetary Fund to strengthen its banking system. As well as the capital hike, the Monte Paschi plan also includes new cost cuts and a gradual reduction in the bank's huge government bond portfolio which totaled 29 billion euros at the end of June, although the economy ministry said it would not affect its role as a market operator. The ministry said it expected the EU approvals process could be completed within two months. The recapitalization will aim to repay a significant portion of special bonds bought by the Italian Treasury ahead of the schedule in the current bailout plan, the ministry said. Additional reporting by Lisa Jucca, Stephen Jewkes and Isla Binnie; Editing by Louise Heavens and Peter Graff