The Vatican bank's top two officials are under investigation for suspected money laundering and police have frozen €23 million of its funds.
Italian judicial sources said bank president Ettore Gotti Tedeschi and director-general Paolo Cipriani were being investigated by Rome magistrates Nello Rossi and Stefano Fava in a case involving alleged violations of European Union money-laundering rules.
The Vatican confirmed the Rome magistrates' action in a statement that expressed "perplexity and amazement" at the move and "utmost faith" in the two men who head the bank, officially known as Institute for Religious Works (IOR).
Mr Gotti Tedeschi (65), has been at the helm of the bank for a year and is a close adviser to Italian economy minister Giulio Tremonti.
The sources said Italy's financial police had preventively frozen €23 million of the bank’s funds in an account in an Italian bank in Rome.
Two recent transfers from an IOR account in the Italian bank were deemed suspicious by financial police and blocked.
One was a transfer of €20 million to a German branch of a US bank and another of €3 million to an Italian bank.
A statement from the Vatican's Secretariat of State said the bank had committed no wrongdoing because it was transferring its own money between its own accounts.
Mr Gotti Tedeschi, who has taught financial ethics at the Catholic University of Milan, also heads an Italian unit of the Spanish Banco Santander, according to its website. He also serves on the board of several major Italian banks.
The IOR primarily manages funds for the Vatican and religious institutions around the world, such as charity organisations and religious orders of priests and nuns. Its cash point machines in the Vatican are perhaps the only ones in the world that allow clients to choose Latin as the language to perform operations.
It was involved in a worldwide scandal in 1982 when it was embroiled in the fraudulent bankruptcy of Banco Ambrosiano, then Italy's largest private bank.
It held a small stake in Ambrosiano, whose president Roberto Calvi was found hanged under London's Blackfriars Bridge the same year.
Several investigations failed to determine whether Calvi, known as "God's Banker", had been killed or took his own life.
At the time the IOR was headed by US archbishop Paul Marcinkus, who died in Arizona in 2006.
The Vatican denied any responsibility for the collapse of Banco Ambrosiano but made what it called a "goodwill payment" of $250 million to Ambrosiano creditors.
Reuters