Italy to give green light to Credit Agricole's bid for Creval - sources

* Italy has special vetting powers to shield key sectors

* Treasury says powers should not be exercised in Creval case

* Credit Agricole offers 10.50 euro a share to buy Creval

* Third-tier bank fighting to secure a better price - sources

ROME, Feb 8 (Reuters) - Italy is set to give an unconditional green light to the takeover bid Credit Agricole Italy plans to launch for small lender Credito Valtellinese (Creval), three government sources told Reuters.

The offer by the Italian arm of France’s Credit Agricole must be approved by the government. Rome has power to block unwanted bids in strategic industries, such as banking, telecoms and health.

The so-called “golden powers” allow Rome to ward off or set strict prescriptions on takeovers in key industries from non-EU and - under a temporary framework in place until June 30 - also EU groups.

The Treasury has sent to the cabinet office, which reports to the prime minister, a recommendation saying such special powers should not be exercised in Creval’s case, the sources said, asking not to be named because of the sensitivity of the matter.

The cabinet office will ask ministers to comply with the Treasury’s request.

That move could be the last decision of caretaker Prime Minister Giuseppe Conte, as former European Central Bank president Mario Draghi steps up negotiations with political parties to forge a new, cross-party ruling coalition.

Barring last-minute surprises, the cabinet meeting should formally approve the unconditional green light as early as Tuesday or Wednesday, one of the sources said.

Credit Agricole Italia in November offered 10.50 euros a share to buy Creval for a total investment of 737 million euros ($887 million).

Creval, which is awaiting the publication of official offer document to respond to the bid, has said it will assess options.

Sources familiar with the matter have said Creval would fight to secure a higher price for its shareholders.

The deal, expected to be formally launched by April, is due to benefit from tax breaks for mergers that Italy approved after the bid was announced, with a view to facilitating the privatisation of bailed-out bank Monte dei Paschi.

Last year, an influential committee on security (COPASIR) raised the alarm about foreign interest in Italian financial companies, saying it could have negative implications for the refinancing of the country’s 2.7-trillion euro debt.

European competition authorities approved the buyout offer for Creval last week.

$1 = 0.8308 euros Reporting by Giuseppe Fonte; editing by Valentina Za and Jane Merriman