* Capital boost will amount to 2 bln euros-source
* Italian Treasury gave green light to debt hike
* Monte Paschi barely passed stress test last year
(Recasts with cap hike size, timeframe)
By Stefano Bernabei
ROME, April 7 (Reuters) - Banca Monte dei Paschi di Siena SpA is set to unveil by early next week a capital hike of 2 billion euros ($2.9 billion), a source close to the issue said, joining a growing number of Italian banks tapping investors for cash.
Monte Paschi, which prides itself as being the world's oldest bank, barely cleared a European health check of lenders last year and like its peers now faces another tough round of EU stress tests.
It needs cash to boost its financial base and repay 1.9 billion euros of government bonds it took in the midst of the credit crisis.
"It's very likely that the capital hike will start early next week," the source told Reuters on Thrusday, adding the capital injection would amount to 2 billion euros.
The Tuscan lender is under pressure to boost its capital ratios after Intesa Sanpaolo, Italy's biggest retail bank, approved a 5 billion euro rights issue on Wednesday.
Poor earnings and rising refinancing costs due to perceived sovereign debt risks have prompted Bank of Italy chief Mario Draghi to ask Italian banks to boost core capital, on average more than 2 percentage points weaker than foreign peers.
Mid-tier lender Banco Popolare carried out a 2 billion euro capital hike earlier this year and UBI Banca is planning to tap investors for up to 1 billion euros.
Fondazione MPS, which owns 56 percent of Monte Paschi, had been reluctant to go ahead with the capital increase as it risked diluting its majority stake.
But it agreed to tap investors after winning a green light from the Italian Treasury to hike its debt by up to 1 billion euros, the source close to the situation told Reuters.
Monte Paschi General Manager Antonio Vigni said at the end of March that the bank was committed to raising capital but gave no details.
"The aim to cover the repayment of ... bonds with an organic capital generation does not appear to be feasible in the present scenario," brokerage Centrosim said in a recent research note. "Therefore the market expects a rights issue coming soon."
Shares in Monte Paschi closed up 0.2 percent while the European sector added 1.1 percent. (Additional reporting by Ian Simpson; Editing by David Holmes) ($1=.6996 Euro)