UniCredit's Chief Executive tried to reassure investors over the bank's heavily discounted 7.5 billion euro (5.7 billion pound) rights issue on Thursday as the share price suffered a second day of steep falls.

Shares in Italy's largest bank by assets dropped 14.45 percent on Wednesday after Unicredit said it would offer new shares at a 69 percent discount -- much larger than that used by UniCredit's peers in recent issues.

The stock fell a further 10 percent on Thursday after a brief suspension from trading on the Milan bourse, before a second halt in trading. The European banking stock index <.SX7P> was 2.2 percent lower.

UniCredit CEO Federico Ghizzoni told Il Sole 24 Ore newspaper he was confident the market would underwrite nearly all of the rights issue -- the biggest by a European bank in more than a year and a litmus taste of market appetite for banking stocks in the new year.

I'm optimistic, he said, adding however that the capital increase was guaranteed by a consortium of banks.

To spread the risk of part of the offer not being taken up by the market, the consortium underwriting the issue has been broadened and is now made up of 27 lenders.

Just under a quarter of UniCredit's historic shareholders have already committed to take up the rights issue, below some analysts' expectations. Days before the issue announcement, Blackrock fund cut its stake in the bank to 1.7 percent from 4 percent.

Ghizzoni said some large U.S. investors had reduced exposure to Europe in the last few months due to sovereign risks.

But we still have important U.S. and Anglo-Saxon funds among our shareholders and many have shown an interest in investing, he stressed.

BONDS

Ghizzoni told the paper the bank planned to keep holdings of Italian government bonds at current levels, quashing speculation that a longer-term cash injection by the European Central Bank could fuel banks' purchases of troubled government bonds.

On (Italian) government bonds we will continue to do what we did in 2011 at auctions. If necessary we will buy at auctions and we'll then contribute to sell on the market. The idea is to keep volumes in our portfolio at current levels, he said.

UniCredit is one of 20 specialist primary dealers with exclusive rights to buy Italian debt at auctions. Italy plans to sell some 450 billion euros in new debt this year.

Analysts say the ECB has indirectly supported Italian Treasury's primary issuance through its purchases of Italian bonds on the secondary market. Primary dealers buying new debt at auction can keep their holdings stable by selling part of them to the ECB.

Ghizzoni reiterated his position that liquidity provided by the ECB should be used chiefly to lend to companies and households. ($1 = 0.7747 euros)

(Reporting by Valentina Za; Editing by Jodie Ginsberg)