* Staying in Russia brings reputational problems, Panetta says

* Intesa and Unicredit are still active in Russia

* Western sanctions reduce the number of potential buyers

STRESA, Italy, May 25 (Reuters) - Italian banks must halt their business in Russia as staying in the country also brings a "reputational problem," European Central Bank policymaker Fabio Panetta said on Saturday.

After Austria's Raiffeisen Bank International, UniCredit is the European bank with the largest exposure to Russia, while Intesa Sanpaolo is working to dispose of its business in the country.

"From there (Russia) you have to get out," Panetta told reporters during the press conference after the end of the G7 finance meeting in Stresa, northern Italy.

"There are objective difficulties because getting out of Russia is complicated, you have to find a buyer knowing that you are being forced, it can be expensive, however you have to get out because there is a reputational problem," added Panetta, the Bank of Italy governor.

UniCredit's Russian arm was this month hit by the seizure of assets worth 463 million euros ($502.12 million) in relation to an aborted gas project for which the banking group had provided guarantees.

Both Intesa and UniCredit have repeatedly said Western sanctions have shrunken the number of potential buyers, making it increasingly hard to leave.

Intesa last year secured the presidential decree which is necessary for a foreign bank to dispose of its Russian business.

However, Italy's biggest lender is still to finalize its exit, pending a green light from Russia's central bank and Italian authorities.

UniCredit CEO Andrea Orcel has always said the bank's goal was to reduce exposure to Russia while minimizing the hit for the lender.

Orcel has said it would not be "morally correct ... writing off and gifting" the group's Russian unit.

Both European banking supervisors and U.S. authorities in charge of enforcing sanctions are monitoring closely the activity of Western banks in Russia and their progress on exit plans, a person close to the matter said.

In addition to the green light needed from Russian President Vladimir Putin and Russia's central bank, any transaction must be cleared by the ECB.

To avoid the risk of sanctions following a deal, the U.S. Treasury Department's Office of Foreign Assets Control must also provide a comfort letter once informed of the identity of the prospective buyer, the person said. ($1 = 0.9221 euros) (Valentina Za reported from Milan; Editing by Keith Weir)