An Italian court sentenced former central bank chief Antonio Fazio on Monday to 3-1/2 years in jail for market-rigging in a 2005 takeover battle for Banca Nazionale del Lavoro (BNL).

Fazio, who was forced to resign as Bank of Italy governor six years ago after appearing to favour domestic bidders over foreign rivals trying to buy Italian banks, has already been given a prison sentence in a similar case.

However, 75-year-old Fazio remains free under an Italian law which says that defendants do not have to begin their jail terms until their last appeal has been rejected.

A Milan court ordered Fazio, who headed the central bank from 1993 to 2005, on Monday to pay a 1.3 million euro (1.1 million pound) fine for his role in the case involving insurer Unipol's unsuccessful bid for BNL.

Fazio was replaced as Bank of Italy chief by Mario Draghi, who becomes president of the European Central Bank on Tuesday.

Mr Fazio cannot understand the reason for this verdict, the ex-governor's lawyer Roberto Borgogna told reporters after the hearing. There were documents that showed that what he did was right, he said.

Unipol, which was ordered to pay a 720,000 euro fine, had held a stake in BNL and launched a bid for the lender in 2005. It became embroiled in a cross-border takeover row with Spain's Banco Bilbao Vizcaya Argentaria (BBVA) . France's BNP Paribas bought BNL for 9 billion euros in 2006.

The court also sentenced former Unipol chairman Giovanni Consorte to three years and 10 months in jail, and fined him 1.3 million euros. Consorte will appeal the verdict, his lawyer said.

All the defendants were also ordered to pay a total of 15 million euros in damages to BBVA.

Italian banks Banca Popolare Vicenza and Banca Carige , along with Deutsche Bank , were cleared of charges under an Italian law making companies responsible for supervision failures.

In May, Fazio was sentenced to four years in jail for market-rigging charges relating to another 2005 takeover battle for Italy's Banca Antonveneta, which is now part of Monte dei Paschi di Siena . Fazio said he would appeal the sentence.

(Reporting by Manuela D'Alessandro)