Banca Carige is to raise money using a state-backed guarantee which Italy approved yesterday via an emergency decree.
The move marks a significant U-turn by the 5-Star Movement in the country's ruling coalition.
The Italian government stepped in to support Carige after the Genoa-based bank was put under temporary administration by the European Central Bank last week following a failed attempt to raise private capital in December.
Carige said today it would tap the state guarantee for funding adding however it was unlikely to turn to the government for capital.
Under the terms of the decree, which reinstates a measure Italy adopted in the past to provide liquidity to the country's banks, the Treasury will guarantee bonds issued by Carige as well as funds the lender might borrow from the Bank of Italy.
Italy has also given Carige the option to apply for state aid under a "precautionary recapitalisation" scheme used in the past to rescue rival Monte dei Paschi, but Carige said this was "a very marginal option."
The government's action marks a significant shift by the 5-Star Movement, which was highly critical of past decisions to use taxpayers' money to prop up struggling banks.
League leader Matteo Salvini defended the decision to intervene, which prompted accusations of hypocrisy from the opposition centre-left.
Keen to prevent another collapse in Italy's battered banking sector, Italian banks in November came to Carige's rescue and provided second-tier capital by buying a €320m hybrid bond.
But the bank's top shareholder, the Malacalza family, in December blocked a new share issue of up to €400m that would have been guaranteed by the bond's conversion into equity.
