MILAN, Feb 26 (Reuters) - A surge in trading of Banco BPM shares is again drawing attention to Italy's third-largest bank, which has long been at the centre of speculation about potential consolidation in the sector.

The stock powered to fresh eight-year highs on Monday in Milan, with monthly trading volumes topping 400 million shares for the first time since April 2022, according to LSEG data.

That means more than 26% of the bank's share capital has changed hands so far in February, according to Reuters calculations based on market regulator Consob data.

The stock's appeal is a combination of the bank's possible role in expected consolidation in Italy, as well as good cash dividend returns, investors and analyst said.

Reporting an 85% rise in full-year profit this month, Banco BPM said it was more than doubling its cash dividend to 56 euro cents a share from 23 euro cents.

"It's now the highest cash-yielding bank in our European coverage, at 18% by year-end and, trading on 5.5 times price-earnings, among the most unloved stocks in Italy," BofA Securities said in a recent note.

"We see this as a buying opportunity," it added.

With its roots in Italy's wealthiest areas, Banco BPM has been in the past a takeover target for bigger rival UniCredit , whose presence in the rich north is considered too small, especially after peer Intesa Sanpaolo in 2020 strengthened its northern foothold with a takeover.

Following is chart highlighting the spike in Banco BPM's traded volumes.

(Reporting by Danilo Masoni and Valentina Za Editing by Mark Potter)