UPDATE 1-Berlusconi's Fininvest ordered to sell 20 pct stake in Mediolanum


* Bank of Italy tells Fininvest to cut stake to 9.9 pct

* Central bank considers Berlusconi unfit to hold bigger stake

* Berlusconi convicted of tax fraud last year

* Mediolanum shares down 3.8 pct (Adds detail, Mediolanum CEO comment)

By Stefano Bernabei and Maria Pia Quaglia

ROME/MILAN, Oct 10 (Reuters) - Fininvest, the holding company of Silvio Berlusconi, must sell a 20 percent stake in Mediolanum because Italy's central bank no longer considers the former prime minister fit to own more than 10 percent of a financial company.

Asset manager and insurer Mediolanum is in the process of registering as a bank, thus falling under the supervision of the Bank of Italy, which Fininvest said had requested the stake sale because of Berlusconi's conviction for tax fraud last year.

The central bank has to approve shareholdings in banks of 10 percent or more. Fininvest currently holds 30 percent of Mediolanum.

Friday's statement by Fininvest prompted a 5 percent fall in Mediolanum's share price before trading was suspended briefly. The shares were down 3.8 percent at 1033 GMT.

At current market prices, a 20 percent stake in the company is worth about 800 million euros ($1 billion).

"This creates a significant overhang," broker Equita said, referring to the potential for the release of a large block of stock to exert downward pressure on the share price.

A source close to the matter said Fininvest now had three months to set up a trust fund into which to transfer the 20 percent stake. Once the fund is set up, it will have up to 30 months sell the shares.

Fininvest declined to comment further.

Mediolanum is controlled by the Doris family with a stake of a little more than 40 percent and Chief Executive Ennio Doris, a close ally of Berlusconi, told Reuters that he could buy up to about half of the shares to be sold by Fininvest.

"I am certainly interested in buying not all the shares, but a stake not exceeding 10 percent," he said, adding that members of the Berlusconi family could also buy some of the shares.

Doris also said that Berlusconi would no longer be able to appoint members on Mediolanum's board because of his conviction.

Berlusconi was expelled from the Senate last November after being convicted of masterminding a complex system of tax fraud at his Mediaset television network. His four-year jail sentence was commuted to one year of community service. (1 US dollar = 0.7894 euro)