UPDATE 2-Italian govt bond yields fall on Monte dei Paschi rescue reports

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* Govt preparing to take stake in Monte dei Paschi -sources

* Italy passes 2017 budget, PM Renzi to resign at 1800 GMT

* Italian bond yields fall back near three-week lows

* Gap between Italy-Germany yields tightest in a month

(Updates prices, adds budget, Renzi resignation timing)

By John Geddie

LONDON, Dec 7 Italian sovereign bond yields fell
to near three-week lows on Wednesday following reports that the
government is preparing to rescue ailing lender Monte dei Paschi
as hopes of a private recapitalisation fade.

Sources told Reuters Italy’s government was preparing to
take a 2 billion-euro controlling stake in the bank by buying
junior bonds held by ordinary Italians.

The government is already the bank’s single largest
shareholder with a 4 percent share. Buying junior bonds, which
would be converted into shares, would take that to 40 percent.

The newspaper…

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