ROME (Reuters) - Technology investments by larger Italian banks lag behind those of their European peers, the central bank said on Friday, urging lenders to step up spending to support innovation in their offer of financial services.

Italian banks have increased their investments in innovative technology four-fold since 2017, but they remain limited, Bank of Italy Governor Fabio Panetta said in the text of a speech at the presentation of the central bank's annual report.

"They need to grow: it would be a serious mistake to continue to fall behind in this area," Panetta said.

Banks with a stronger digital presence are better able to diversify revenues and gain market share in lending, he added.

Italy's biggest bank Intesa Sanpaolo is aiming to spend 5 billion euros ($5.4 billion) in technology in 2022-2025, as it switches to a cloud-based core banking IT system which it has successfully tested at a new digital bank.

Italy's No.2 bank UniCredit, which a decade ago outsourced its IT infrastructure, targets tech spending at 2.8 billion euros in 2022-2024.

Back in 2019, Spain's largest bank Banco Santander said it would invest some 20 billion euros in billion in digital and technology.

The Bank of Italy has stepped up its monitoring of IT outsourcing contracts, including through on-site inspections, Panetta said, adding there had been a sharp increase in serious cyber incidents reported by financial institutions last year.

"The financial sector is an attractive target, given its dependence on digital data and procedures," he said, stressing that geopolitical tensions and the actions of nation states increase cyber risks.

Technology is also key to drive cost savings and lower service charges for customers, the Bank of Italy noted, with the cost of online accounts being on average 60% of the cost of traditional accounts.

However, banks must also use technology to improve the quality of their services and offer better products, so as to improve their reputation and their client relationships, "which are their most valuable assets," Panetta said.

($1 = 0.9242 euros)

(Reporting by Valentina Za and Giuseppe Fonte, editing by Gavin Jones)