WASHINGTON - Italy's financial system has shown impressive strength but the ongoing recession remains a major threat to its banks, the International Monetary Fund (IMF) said on Tuesday.

"The Italian financial system has shown remarkable resilience in the face of a severe and prolonged recession at home and a major crisis in Europe," the IMF said in a report on the country's banks.

However, it said: "While stabilised, the Italian financial system is not immune from risks: continuing weakness in the real economy and the link between the financial sector and the sovereign remain key risks."

It said the recession is exacerbating the rise in bad loans held by the banks and is cutting into their profitability - leading banks to provision less. In addition, banks with large holdings in Italian government bonds remain at risk if the yield on government debt rises.

"While Italian sovereign yields have declined from their peaks, the crisis in Europe has not ended," the IMF said.