(Repeats from MAY 15, no changes to text)
* Credito Valtellinese had strong hedge fund interest
* Several Italian banks report reduction in bad loans
* Italy one of few "big opportunities" in Europe
By Abhinav Ramnarayan, Maiya Keidan and Alasdair Pal
LONDON, May 15 (Reuters) - Major hedge funds have picked Italian mid-tier banks as one of Europe's few remaining recovery plays, betting they will shed billions of euros in bad loans.
Europe's 2010-2012 debt crisis left Italy's banks with among the euro zone's biggest hangovers, some 285 billion euros ($338 billion) of soured debt on their balance sheets.
But when Credito Valtellinese sold new shares in a February rights issue for eight times its market value, they were lapped up by hedge funds in the United States and Britain.
Now the mid-sized Italian bank counts Algebris Chief Investment Officer Davide Serra, Toscafund Asset Management and a hedge fund run by Eurizon Capital SGR among its biggest investors, Thomson Reuters data shows.
So far the bet seems to be paying off as Italy's bank shares have risen 15 percent year-to-date against a fall of 1 percent for European banks, while Credito Valtellinese stock has risen 7.5 percent since the rights issue completion.
Although the price-to-book ratio of Italian banks has improved since Rome announced a state bailout fund in 2016, it trades around 8 percent below the European sector average.
Even the possible formation of a new government comprising two anti-establishment parties has not put off many of the funds contacted by Reuters, some of whom invested in Greek government bonds on a similar bet, who said the investment stacked up despite the vagaries of Italian politics.
Italy's bad loans are a legacy of the recession that followed the debt crisis and with small and medium-sized businesses heavily dependent on bank lending, the soured loans have long been a drag on the third biggest euro zone economy.
But pressure from regulators has begun to have an impact and the ratio of gross impaired loans to total loans has fallen to 14.5 percent from 17.3 percent a year ago, Bank of Italy data shows, the biggest improvement since the global crisis.
Even Italy's highest-profile problem lender, Banca Monte dei Paschi di Siena, has reported progress.
"It's the last financial sector in Europe that is very cheap and there is a roadmap to recovery in the next couple years," said Giuseppe di Mino of Amber Capital, citing Credito Valtellinese as an example of a compelling opportunity to gain exposure to the sector and its improving loan portfolios.