* Board meets on Tuesday on how to boost core Tier 1
* Shareholders could back cap hike in exchange for dividend
* Local issues "determining element" for bank
* Shares down 0.7 percent
(Adds analyst comment, background, share price)
By Carlo Saccon
TRIESTE, Italy, Sept 24 (Reuters) - UniCredit, Italy's biggest bank, hinted it was leaning towards a 4 billion euro ($5.9 billion) capital hike by saying shareholders worried over dividends would be rewarded for backing the increase.
"We are businesses and we must understand that if we ask money from a foundation for our capital, we must assure it a return that is sustainable over time," chief executive Alessandro Profumo said at a management seminar on Thursday.
A capital hike by UniCredit, the Italian bank hardest hit by the downturn, would remove the need for state aid from Italy and Austria aimed at shoring up its core Tier 1 capital ratio, now at the lower end of big European banks.
UniCredit's board is scheduled to decide on Tuesday on its capital moves. Reports have said six foundations, which hold about 15 percent of UniCredit's shares and rely on dividends to fund charitable and cultural spending, could back a capital hike if UniCredit offered to pay a cash dividend.
Indirectly referring to the foundations' regional roles, Profumo said a focus on local Italian issues was a "determining element" for UniCredit.
The biggest lender in recession-hit central and eastern Europe paid out its 2008 dividend in shares rather than cash as it carried out a 3 billion euro capital increase.
Analysts view a cash call as more attractive than conditions attached to state aid, including bonus and dividend restrictions, lending pledges, and the need to answer to a government shareholder.
UniCredit shares were down 0.7 percent at 2.5325 euros at 1520 GMT, outperforming a DJ Stoxx European banks index that was off 1.7 percent.
BIG-SIZE INCREASE
"UniCredit could do a big-size capital increase given market appetite at the moment. It depends how much the foundations are willing to put on the table," said a financial source who spoke on condition of anonymity.
"They could look at a total package of 4-6 billion euros. I would not be surprised if they looked at a 30 percent-range discount" from the current share price.
UniCredit, which is mulling 4 billion euros in state aid split between Austria and Italy as well as a capital hike, said on Monday all options were open.
Raising equity would let UniCredit "reduce uncertainty about future repayments to the government while improving not only the level of capital but also the quality of the ... capital base", Goldman Sachs said in a research report.
The six foundations would have to inject 600 million euros to avoid dilution in earnings per share, it said.
In January, Italy's centre-right government set aside 12 billion euros to bolster capital as the credit crisis worsened. The aid is also aimed at supporting lending to smaller business hit by the worst recession since World War Two.
Only two banks -- mid-tier lenders Banco Popolare and Banco Popolare di Milano -- have gone through with the programme, for a total of 1.95 billion euros.
Austria is demanding the right to take a stake in UniCredit unit Bank Austria if it injects state capital into it. Austria has also ruled out UniCredit taking state aid from it but not from Italy.
Italy's Il Messaggero newspaper reported on Thursday that Profumo had gone to Vienna on Wednesday to meet finance ministry officials. Sources close to the situation said Profumo had been to Vienna but had not met government officials. (Additional reporting by Boris Groendahl in Vienna, Writing by Ian Simpson; Editing by David Holmes and Dan Lalor) ($1 = 0.6790 euro)