BERLIN - A bank scandal has flared up in Italy one month ahead of elections, with questions raised about European Central Bamk (ECB) chief Mario Draghi's role in overlooking the case and PM Mario Monti using taxpayer money to bail out the bank.

Banca Monte dei Paschi di Siena, the world's oldest bank and Italy's third largest lender, is facing over €700 million in losses after its new management found hidden financial transactions gone bad dating back to 2006-2009, which had been kept secret from regulators.

Monti, who is seeking a second mandate as Prime Minister next month, is now being accused by his rival Silvio Berlusconi of having levied extra taxes only to save a rotten institution.

Monte dei Paschi got a first bailout during Berlusconi's term as Prime Minister but filed for more government aid of €500 milllion last year, bringing the total cost of the rescue to €3.9 billion.

One of the hidden deals was with Deutsche Bank and was called "Project Santorini." It provided Monte Paschi with a €1.5 billion loan designed to cover losses from an older trade with the German bank. Bloomberg news agency saw documents indicating Deutsche Bank made €60 million in profit out of the situation.

The German bank was itslef convicted of fraud last month in a separate case on selling bad financial products to the city of Milan.

Speaking in Davos on Thursday (24 January), Monti said the bailout will be delayed pending a further review of the Monte Paschi's accounts.

"The subscriptions of those financial tools hasn't happened yet, among other reasons because the needed conditions for the operation to be completed haven't been met yet," he told a press conference.

He dismissed the accusations of him levying taxes to save the bank as "complete fantasy."

The bank has also complained that politicians are "exploiting" the situation.

Draghi in the firing line

Mario Draghi has also come under fire because he was at the time chairing Italy's central bank which was in charge of supervising trades, such as the Monte Paschi transactions.

Former economy minister Giulio Tremonti tweeted on Wednesday that it is "stupefying" that Draghi failed to discover or prevent the dodgy dealings.

Italy's acting economy minister Vittorio Grilli also told press on Thursday the responsibility lies with the Draghu-era Bank of Italy, not with the current government.

"It wasn't us that did the controlling. On the checks, all I will say is that it is the responsibility of the Bank of Italy," he said.

Meanwhile, Berlusconi's centre-right party is trying to drag the centre-left opposition - the pollsters' favourite to win the upcoming elections - into the mud.

The bank, founded in 1472, has its headquarters in the Tuscany region controlled by the center-left PD party.

"Monte Paschi is close to collapse. This is an example of how the left would govern the country," said Angelino Alfano, one of Berlusconi's deputies.

For his part, Beppe Grillo, a comedian who runs the populist Five Star Movement - polled to become the third biggest party in parliament - is also trying to capitalise on the affair.

"I don't see why we should give almost €4 billion in public money to cover up a bunch of thieves," he told Reuters on Wednesday.

Grillo, who owns shares in Monte Paschi, said he will participate in a shareholders' meeting on Friday and ask for the bank to be nationalised.