Italy has reined in plans to help borrowers struggling with debt repayments and will focus only on very small business loans, a government document and ruling politicians said, after a much bigger plan to intervene roiled investors.

Lawmakers from Prime Minister Giorgia Meloni's party alarmed investors in its 300 billion euro ($323 billion) bad loan market earlier this year, when they proposed allowing distressed borrowers to repay their debt at a discount after their bank had sold it on.

"We have put our plans on hold," Saverio Congedo, a lawmaker from Meloni's Brothers of Italy party who had backed the initial proposal on borrowers in arrears, told Reuters.

"The government is now working instead on relief measures with a more limited scope, so as to help only small businesses," he added.

Bad loan specialists had hoped the government would drop its plans entirely because they say that any changes, however small, create uncertainty and keep investors away.

Championed by Industry Minister Adolfo Urso, the legislation being discussed would target only corporate loans that have not yet been sold as part of a portfolio and with a size of 250,000-500,000 euros for each financing, the document showed.

The initial scheme created panic within the industry because it applied retroactively and to loans worth up to 25 million euros - a very significant amount for Italian companies, which typically have less than 10 employees.

Italy's industry ministry aims to finalise its proposal early next year, after the approval in parliament of the 2024 budget, Congedo said.

Officials discussed the plan at an informal meeting with representatives from the bad loan industry in recent weeks, politicians said.

Before it can be put forward, the scheme requires negotiations between ministries as the Treasury, which is in charge of financial regulation, is opposed to measures that affect the bad loan market, two separate people who spoke to Treasury officials added.

The document showed the industry ministry was aware of the problems the initial bad loan proposal posed and wanted to work with sector players to come to an agreed solution.

Italian banks' clean-up efforts after the global financial crisis of 2008-2009 and the sovereign debt crisis of 2011-2012 have created Europe's biggest market for bad debts.

Large-scale disposals encouraged by bank supervisors have seen banks offload hundreds of billions in loans which specialised companies are now trying to recover.

Banks normally shed small sized loans in bulk and set an overall price for the portfolio, without going to the effort of accurately pricing individual loans.

The industry ministry wants to work with bad loan specialists to come up with a system to price single loans so as to be able to intervene before they are sold in bulk and help borrowers without giving them an incentive not to honour their debt, the document showed.

In an effort to meet halfway with the industry ministry, sector specialists are studying possible relief measures for mortgages to help homeowners who risk losing their homes due to the sudden spike in interest payments.

($1 = 0.9276 euros)

(Reporting by Valentina Za in Milan and Giuseppe Fonte in Rome Editing by Mark Potter)