ROME, Aug 9 Reuters Italy has set a cap at 0.1 of total bank assets for the new tax targeting profits lenders reaped from higher rates, after the surprise announcement of the new levy sparked a market selloff on Tuesday.

Italian banks closed down 7.6, with sector leader Intesa Sanpaolo losing 8.6 and midsized BPER down 10.9.

While other European countries, such as Spain and Hungary, have introduced windfall taxes on banks, analysts said Italy39;s decision found the market unprepared and was particularly damaging for investor confidence.

The conservative government of Prime Minister Giorgia Meloni had floated the idea of a bank tax, but it seemed to have dropped the plan and the actual decision came as a surprise even to ministers gathered for a cabinet meeting on Monday night.

In a bid to reassure markets, the Treasury late on Tuesday said the proceeds from the tax would not amount to more than 0.1 of lenders39; total assets.

Earlier on Tuesday Citi analysts had estimated the tax could bring into state coffers a sum amounting to as much as around 0.5 of total 2023 riskweighted bank assets RWAs.

The proceeds are anyway expected to remain below 3 billion euros, according to sources in Rome and analyst calculations.

The tax, which sent shockwaves across the European sector, targets the ratedriven increase in banks39; net interest income, or the profit lenders reap from the gap in lending and deposit rates.

As the European Central Bank raised official rates, banks…