(Adds graph, details) MILAN, Oct 11 (Reuters) - The pace of growth in Italian bank lending to businesses slowed further in August, falling to its lowest level since February 2020 after a credit surge fuelled by state guarantees, data showed on Monday. A monthly Bank of Italy report on the balance sheets of domestic banks showed loans to non-financial companies grew by 1.2% year-on-year in August, down from a 1.8% rise in July. That is the slowest pace of expansion since a 1.18% contraction recorded in February 2020, when the COVID-19 pandemic first emerged in Italy. Extraordinary measures deployed by the government to prop up businesses in the face of restrictions have halted the declining trend in lending. Bank credit to businesses expanded by as much as 8.3% year-on-year in December, marking a 12-year high. Monday’s data also showed Italian residents’ deposits with domestic banks stood at 2.76 trillion euros ($3.19 trillion) in August, down from 2.78 trillion euros in July. Banks’ holdings of domestic government bonds increased to 424.29 billion euros from 422.72 billion the previous month. Gross unpaid loans were 46.99 billion euros at the end of August compared with 48.41 billion euros a month earlier. ($1 = 0.8646 euros) Reporting by Sara Rossi, editing by Valentina Za Our Standards: The Thomson Reuters Trust Principles.