Monte dei Paschi says it will press ahead with plans to raise €5bn (£4.2bn) from investors before the end of the year and avert a bailout by the Italian government.

Italy's third largest bank said in a statement that it would try to raise money by asking 40,000 retail investors holding €2.1bn of the bank's bonds to swap them for new shares.

It has already raised €1bn from institutional investors using a similar method and is seeking to raise an additional €1bn from Qatar's sovereign wealth fund.

However, the debt-to-equity swap deal requires approval from Consob, Italy's market watchdog.

Monte dei Paschi had asked until 20 January to raise the money it needs to avoid a bailout but the request was turned down by the European Central Bank, according to Reuters.

A source told the agency that the ECB rejected the proposal on the grounds that a delay would achieve little. Shares in Monte dei Paschi closed more than 10% lower on 9 December following the report.

"There's still time. Qatar is in the game and available to put in the amount that is being talked about," a source close to the bank told Reuters.

Alarms were raised over Monte dei Paschi after the lender scored lowest of the 51 European institutions that were subjected to stress tests by the European Banking Authority in July.

It is weighed down with €46bn of non-performing loans and its share price has fallen by more than 80% this year. The Tuscan lender needs to raise fresh capital before the end of December to avoid being wound down.

On 11 December, Italian Foreign Minister Paolo Gentiloni was asked to form a government by the country's president following the resignation of Matteo Renzi.

The source said Monte dei Paschi's board was encouraged by Gentiloni's appointment and that it was confident that it could still privately raise the money needed to avoid nationalisation.