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By Stefano Bernabei

ROME (Reuters) - Italy's market regulator sparked a political storm on Thursday when he told parliament that an ally of former Prime Minister Matteo Renzi had spoken to him in 2014 about the fate of a struggling bank where her father was a board member.

The case is highly sensitive ahead of elections due early next year. Renzi's ruling Democratic Party (PD) is already sliding in opinion polls.

The opposition has long accused cabinet undersecretary Maria Elena Boschi of having a conflict of interest when she allegedly took steps to try to save Banca Etruria, a local bank based in her home town of Arezzo.

Boschi, who was then minister for reforms, has repeatedly denied exerting any political pressure in deciding the future of Banca Etruria, which was eventually rescued by the state.

However Giuseppe Vegas, head of financial market watchdog Consob, said on Thursday Boschi had told him she was worried about a possible merger between Etruria and fellow lender Banca Popolare di Vicenza because of its impact on the local gold industry.

Vegas, a former junior minister from Silvio Berlusconi's Forza Italia (Go Italy!) party, was testifying before a parliamentary commission looking into numerous banking collapses in which thousands of Italians lost their savings.

Vegas said Boschi had asked to see him in Milan, where Consob is based, and had revealed to him that her father, Pierluigi, would soon become vice president of the bank.

His testimony creates more problems for Renzi, who has always defended Boschi, a fellow PD member and one of his closest allies throughout his political career.

Opposition parties from both the left and right immediately called for Boschi to resign.

"Boschi lied to parliament, she lied to the country and she lied to savers," said Alessandro Di Battista, a senior lawmaker from the anti-establishment 5-Star Movement, which leads in opinion polls.

The banking commission, which was set up in September, has become a focal point of political campaigning ahead of the election, which is expected to be held in March.

Boschi said she had no intention of resigning, adding that she had met with Vegas on several occasions but had never urged him to take any particular action over Banca Etruria.

"I never ever exerted any pressure. Never," she said in a post on Facebook, and challenged her critics to point out discrepancies in testimony she gave to parliament two years ago.

Emanuele Fiano, a prominent PD deputy, accused the opposition of "calumny, which has always been the weapon of losers".

The PD, which has been under fire for failing to prevent the bank collapses, has instead blamed the Bank of Italy for inadequate supervision, and next week the central bank's governor Ignazio Visco is due to testify to the commission.

The commission will also hear Federico Ghizzoni, the former CEO of UniCredit, one of the country's largest banks, next week.

In a book published this year, the former director of Italy's biggest newspaper, Corriere della Sera, said Boschi asked Ghizzoni in 2015 to look into the possibility of buying Banca Etruria.

Boschi denied the report and threatened legal action against the journalist, but Ghizzoni never denied it and said he would only comment if called on to do so by parliament.

(Reporting by Stefano Bernabei; Writing by Gavin Jones; Editing by Hugh Lawson)

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