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* Approves 1 euro offer for Etruria, Marche, CariChieti
* Resolution fund to inject 450 mln euros into lenders
* Banks will first sell 2.2 bln euro soured debts to Atlante (Recasts with details)
By Valentina Za and Andrea Mandala
MILAN, Jan 12 (Reuters) - Italy took another step to clean up its troubled banking sector on Thursday with the transfer of three small lenders it rescued from bankruptcy in late 2015 to UBI Banca.
The country's fifth-largest bank said it plans to raise up to 400 million euros ($425 million) in capital after agreeing to pay 1 euro for Banca Marche, Banca Etruria and CariChieti, which along with CariFerrara have been a major headache for the government.
All four banks were rescued in November 2015, drawing 4 billion euros from a deposit-guarantee fund financed by other lenders and writing off shares and junior bonds, in a blow to ordinary Italians' confidence in the banking system.
The Bank of Italy, which owns the four lenders through the resolution fund, had struggled to find a buyer after rejecting bids from private equity investors over the summer as too low.
A deal was struck with UBI after lengthy negotiations for it to buy three of the lenders, which have assets totalling 23.3 billion euros but are all unprofitable and are still weighed down by soured debts, despite a bad loan spin-off.
UBI refused to take on CariFerrara - which may be acquired by Popolare Emilia Romagna - but it finally agreed to a share issue of the size demanded by the European Central Bank (ECB) to ensure it did not weaken its balance sheet.
The bank's CEO Victor Massiah managed to negotiate a number of favourable conditions and markets cheered the deal, which will boost UBI's market share by more than 1 percent, with its shares rallying as much as 12 percent.
Under the terms of the deal, Italy's resolution fund, which is funded by all the country's main lenders, will inject 450 million euros into the three banks before the sale.
The three banks will also sell 2.2 billion euros in impaired loans to banking industry rescue fund Atlante, which a source close to the matter said would invest up to 10 percent of the 2 billion euros it can use to buy bad debts.
UBI said its core capital ratio, which stood at 11.3 percent at the end of September, would remain above 11 percent after the acquisition thanks to the cash call.
The bank said its core capital in 2020 would exceed a target of 12.8 percent to stand at 13.5 percent as it would benefit from 600 million euros in deferred tax assets and apply its own internal risk models to the three banks' assets. ($1 = 0.9405 euros) (Additional reporting by Paola Arosio; Editing by Alexander Smith)