MILAN, Sept 12 (Reuters) - Insolvent loans held by Italian banks fell to a three-year low in July, data showed on Tuesday, as lenders stepped up efforts to shed the legacy of a deep recession that ended in 2014.
The Bank of Italy said in its monthly report that Italian banks held 173.6 billion euros ($208 billion) in insolvent loans in July, down from 192.0 billion euros a month earlier. It was the lowest level since July 2014.
The drop reflects a 16 billion euro sale that Italy's biggest bank UniCredit struck in July with investment funds Pimco and Fortress.
A downturn that bankrupted thousands of small businesses has saddled Italian banks with a pile of soured debts that tie up precious capital and curb profitability.
Under pressure from regulators to cut these assets, banks are trying to improve their recovery rates but sales, which are normally carried out at a loss, remain the quickest way to offload them.
UniCredit raised 13 billion euros in capital this year to offset the hit from writedowns of bad loans that paved the way for the July sale.
Net of writedowns, Italian banks' bad debts stood at 65.8 billion euros at the end of July from 71.2 billion euros in June, the Bank of Italy said. ($1 = 0.8362 euros) (Reporting by Valentina Za, editing by Steve Scherer and Louise Heavens)