The world’s oldest bank, Monte dei Paschi di Siena, has launched a cash call on shareholders as part of its efforts to raise €5bn (£4.2bn) and avoid a taxpayer rescue.

Its shares fell 8.5% in early trading as the bank began its attempt to entice institutional and retail investors to snap up fresh shares. The offering is only one part of its strategy to bolster capital. It is also asking bondholders to swap their investment for shares, a process that must be completed by the end of the year.

Italy’s referendum on constitutional reform prompted the resignation of prime minister Matteo Renzi earlier this month, creating fresh political turmoil in the midst of Monte dei Paschi’s plan to sell shares by the end of the year.

This fuelled fears that the Italian government would have to step in to help save the country’s third biggest bank in a move that could force thousands of private investors who hold €2.1bn worth of bonds to take losses. New EU rules intended to protect taxpayers from bailing out banks mean that bondholders must take a hit before government money can be used.

The bank has become the focus of fears about the Italian banking system which is saddled with €360bn of bad debts amassed in recent years. Unicredit, Italy’s biggest bank, last week announced plans to raise €13bn in through a record-breaking share issue and axe 11% of the workforce.

The Italian government has made clear it is ready to act as backstop to MPS although last week Rome insisted the bank must be able to raise the funds through the markets.

MPS is being forced to take steps to boost its capital position after it was assessed as the weakest performing of 51 European banks subjected to stress-tests – a financial health check - in results published in July. The European Central Bank has refused to extend its deadline from the end of the month for MPS to boost its capital position.

The share offer for institutional investors closes on Thursday while retail investors have to decide whether to buy shares by Wednesday. The bank will also attempt to package up more than €20bn of troubled loans to clean up its balance sheet.

If the Italian government had to stump up cash it would constitute a “precautionary recapitalisation” because the bank holds enough capital to meet current regulatory minimums.