"REUTERS": Fitch cut the ratings of eight Italian mid-sized banks.

Fitch cut the ratings of eight Italian mid-sized banks on Friday, citing rising funding costs for banks among downside risks as Italy faces recession.

Fitch said the eight banks, including cooperative lenders such as Banca Popolare di Milano and Banca Popolare dell'Emilia Romagna, might be forced to revise their medium to long-term capital targets as they face an increase in the cost of funding and a deteriorating credit quality.

The agency had in October cut Italy's sovereign credit rating by one notch to A+ with a negative outlook, citing a worsening of the euro zone debt crisis -- a move which followed similar recent adjustments by Standard & Poor's and Moody's.

"The agency believes that Italy is probably already in recession," Fitch said in a statement on Friday.

"Given the weak outlook for the economy, a renewed acceleration of asset quality deterioration is a real risk, and increased loan impairment charges would weigh on the already weakened operating profitability of the banks," Fitch said.

"Funding costs will increase as competition for customer deposits has become tougher and because of the widening spreads on Italian government bonds," it said.

Italian bond yields soared on Friday after borrowing costs soared in a short-term debt auction, heightening questions over the sustainability of Italy's debt and raising pressure on Rome's new emergency government.

However, Fitch said banks are still capable of attracting funding at costs well below government bond yields, adding maturing amounts should be manageable for most banks in 2012.

Fitch, which cut the rating of Italy's five largest banks last month, said it saw a possible consolidation trend in the medium term among those Italian small and medium-sized banks which may find it harder to compete.