* Veneto Banca to launch 1 bln euro IPO early June
* Italian bank rescue fund likely to be involved -source
By Valentina Za
MILAN, May 26 (Reuters) - Italy's recently-created bank rescue fund Atlante is negotiating to backstop a 1 billion euro ($1.1 billion) initial public offering (IPO) for Veneto Banca, two sources told Reuters on Thursday.
Atlante last month acted as a backstop to a 1.5 billion euro share offer at fellow regional bank Banca Popolare di Vicenza, which failed to list and is now 99 percent owned by the 4.25 billion euro bailout fund.
The fund is in talks with Intesa Sanpaolo's investment banking unit Banca IMI, the global coordinator of the cash call, over a sub-underwriting contract that would commit it to take on any unsold shares in Veneto, sources close to the process said.
The flotations of the two Veneto-based banks had fuelled government concerns that a failure could have a domino effect on the sector, leading to the creation of Atlante.
Both banks are under investigation over the sale of shares to their own customers. Like Popolare Vicenza, Veneto Banca must raise capital by the end of June to comply with a European Central Bank (ECB) demand and avoid been wound down.
Ten banks led by Banca IMI are guaranteeing Veneto Banca's cash call. Intesa, which has given Atlante 845 million euros, has said that should the capital raising fail, the bailout fund would have to step in.
To avoid a repeat of Popolare Vicenza's flop, Veneto Banca needs at least 250 million euros from investors to be allowed to list, under Italian rules on minimum share free floats.
Its hopes of success are pinned mainly on a group of local shareholders with a combined 15 percent holding.
They have vowed to fork out 150 million euros to avoid diluting their stake and to help find the additional 100 million euros needed to ensure the listing.
However, one source said the shareholders would struggle to find the money, making Atlante's intervention necessary.
A spokesman for the shareholders said they were working to reach their goal, while a second source said it was too early to say that the offer would fail as pre-marketing, which started on Friday, does not end until the middle of next week.
Negative interest rates that eat into banks' earnings and dent investor appetite for the sector have hit Italian bank shares particularly hard, losing a third of their value this year due to worries about 360 billion euros in bad loans accumulated during a harsh recession.
One source said the pricing of Veneto Banca's shares would value it 0.34 times its tangible equity - broadly the same as rival UBI Banca, which is seen as a less risky bet, and above a ratio of 0.2 at Italy's third-largest bank Monte dei Paschi di Siena.
Analysts expect Veneto Banca to post a loss in 2016, after losing 1.9 billion euros in 2014-2015, and to fail to meet its 2018 profit goal, confidential studies prepared ahead of the IPO showed last week. (Editing by Alexander Smith)