MILAN (REUTERS) - The European Central Bank has rejected a request by Italy's Monte dei Paschi di Siena for more time to raise capital, a source said on Friday, a decision that piles pressure on the Rome government to bail out the lender.

Italy's third-largest bank, and the world's oldest, had asked for a three-week extension until January 20 to try to wrap up a privately funded, 5-billion-euro (S$7.51 billion) rescue plan in the face of fresh political uncertainty.

The ECB's supervisory board turned down the request at a meeting on Friday on the grounds that a delay would be of little use and that it was time for Rome to step in, the source said.

The Italian government is expected to intervene in the next few days to recapitalise the bank to avert the risk of it being wound down, according to banking sources said.

A Monte dei Paschi spokesman said the bank had not received any communication from the ECB. Its board is expected to meet later on Friday.

Shares in the Tuscan lender were suspended from trading due to excessive losses after falling 7.3 per cent on the Reuters report that the ECB - the euro zone's banking supervisor - had rejected its request for more time.

A failure of Monte dei Paschi could threaten the savings of thousands of retail investors, ripple across the wider banking sector and provoke a financial crisis in the euro zone's third-biggest economy.

Italy faces the risk of early elections, and the prospect of an anti-euro party coming to power, after Prime Minister Matteo Renzi quit this week following the heavy defeat of his plan to reform the constitution in a weekend referendum.

One banking source said the consortium of investment banks that had been due to decide whether to underwrite the private capital-raising believed there was not enough time or willing investors to execute the deal by the year-end deadline imposed by the ECB.

Earlier on Friday, the bank's senior management met Economy Minister Pier Carlo Padoan and the leading investment banks behind the private rescue plan - JPMorgan and Mediobanca , a treasury source said.