The central bank's share capital is to be hiked dramatically to up to 7.5 billion euros (6.17 billion pounds) from its previous value of 156,000 euros, which had not been changed since the 1930s.

The law will enable the commercial banks to improve their balance sheets from 2015, and also help public finances thanks to the taxation of the capital gain the banks will register. It sets a 3 percent limit on stakes by single shareholders.

Intesa Sanpaolo (>> Intesa Sanpaolo SpA) is the main shareholder in the Bank of Italy, with a 42 percent stake, followed by UniCredit CRDI.MI, with a 22 percent stake.

Troubled lenders Banca Monte dei Paschi di Siena (>> Banca Monte dei Paschi di Siena SpA) and Banca Carige (>> Banca Carige SpA) hold 2.5 percent and 4 percent of the central bank respectively.

The decree, which had already passed through the Senate, was approved in the lower house just hours before the midnight cut-off after which it would have expired.

Its passage had been slowed by filibustering by the anti-establishment 5-Star Movement, which objects to what it views as the "privatisation" of the central bank and a "gift" to banks who are not doing enough to help Italy's struggling economy.

Data this month showed bank lending to Italian companies fell in November at its steepest rate since records began 10 year ago.

The decree also scrapped the final instalment in 2013 of an unpopular housing tax on primary residences. ($1 = 0.7329 euros)

(Reporting by Roberto Landucci; writing by Gavin Jones; editing by Andrew Roche)