By Valentina Za and Gianluca Semeraro

Italy's UniCredit posted its biggest quarterly loss in three years on Wednesday and cut its profit outlook for 2021 as the coronavirus pandemic threw its strategic overhaul off course.

Chief Executive Jean Pierre Mustier told analysts there was too much uncertainty to provide profit guidance this year and it would be late 2020 or early next year before he could update them on a turnaround plan he had unveiled in December.

"It is too early to quantify the shape and pace of any recovery and hence to give any updated guidance on the full year ... we start going back to normality in 2021," he said, adding however that could change, in particular if a vaccine was not found.

Italy's coronavirus outbreak, one of the world's deadliest, hit just as UniCredit was emerging from years of cost cutting and restructuring, obstructing Mustier's plans to boost shareholder returns through dividends and share buybacks.

After a strict near two-month lockdown that paralysed business activity, the euro zone's third-largest economy now faces its steepest contraction since World War II.

Mustier said he was confident that Italy's largest bank would be able to reach a 2021 profit of 3.0-3.5 billion euros, or 75-80% of its original goal, if the euro zone's economy rebounded strongly as forecast.

UniCredit posted a 2.7 billion euro (2.36 billion pounds)first quarter loss, almost double the average 1.5 billion euro forecast by analysts in a bank poll, as it braced for a spike in virus-led defaults.

UniCredit wrote down loans to the tune of 1.26 billion euros in the first quarter after warning that an expected 13% contraction in the euro zone's economy this year warranted an additional 900 million euros in loan loss provisions.

"We want to remain, as always, conservative ... we want to take the pain early," Mustier said.

The bank also booked extraordinary charges of 3 billion euros stemming from the disposal of part of its stake in Turkish rival Yapi Kredi as well as one-off costs associated with 5,200 voluntary layoffs.

UniCredit's caution contrasts with the stance of rival heavyweight Intesa Sanpaolo which on Tuesday said its 2020 net profit would be at least 3 billion euros after virus-related writedowns for half that amount.

Exceptionally strong trading gains and low loan loss provisions drove a surprise 10% rise in Intesa's first-quarter net profit.

By contrast, a sharp drop in trading income weighed on UniCredit's first-quarter revenues which came in marginally below expectations at 4.38 billion euros, down 8% from a year earlier despite a 5% increase in fees.

"UniCredit reported a heavy kitchen-sink set of results ... to reflect the most conservative macro scenario we have seen during this results season," analysts at Mediobanca Securities said in a note.

Mustier said UniCredit would review in the fourth-quarter a decision to put on hold 2019 dividend payments as requested by regulators.

UniCredit's best-quality capital ratio advanced slightly in the quarter to 13.4% of assets and the 'MDA' buffer monitored by regulators to allow dividend distribution was well above the bank's target.

"UniCredit is equipping for a walk in the desert with strong operating trends and with a 436 basis point MDA buffer, i.e. 200 basis point ahead of management target. This allows UniCredit to confirm the 2021 payout policy," Mediobanca Securities said.

Shares reversed an initial fall to rise 1.1% by 1130 GMT.

Italian banks are bracing for a new raft of bankruptcies and UniCredit said it expected Italy's corporate default rate could surge this year to 3.5% from 1.9%.

The bank, which has operations also in Germany, Austria and Eastern Europe, said so far payments on 28 billion euros in loans had been frozen due to governments' debt moratorium packages.

Mustier said part of the COVID-19 provisions were needed to cover against risks such loans could deteriorate after the debt holidays ended.

(Reporting by Valentina Za; Editing by Muralikumar Anantharaman and Carmel Crimmins)