Italy approves Credit Agricole's bid for Creval - sources

* PM Draghi approves French bid after taking office

* Credit Agricole offering 737 mln euros for Creval

* Deal to benefit from tax breaks to spur corporate tie-ups

ROME, Feb 15 (Reuters) - Italy has given a green light to the takeover bid Credit Agricole Italia plans to launch for small lender Credito Valtellinese (Creval), two government sources told Reuters on Monday.

The offer by the Italian division of France’s Credit Agricole needed approval by the Rome government, which reserves the right 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-European Union and - under a temporary framework in place until June 30 - also EU groups.

The Treasury last week sent to the cabinet office of former Prime Minister Giuseppe Conte a recommendation saying such special powers should not be exercised in Creval’s case.

But the outgoing government decided on Friday to leave the task in the hands of former European Central Bank President Mario Draghi, who was sworn in as prime minister on Feb. 13.

The new cabinet met immediately after taking office and agreed to comply with the Treasury’s request, the two sources said.

The approval comes with non-binding recommendations attached to it, one of the sources said, without specifying what the suggestions are.

Credit Agricole Italia in November offered 10.50 euros a share to buy Creval for a total investment of 737 million euros ($893 million).

Shares in Creval have been trading consistently above the offer price. On Monday they fell 0.6% to 11.98 euros by 1510 GMT.

Analysts at Kepler Cheuvreux have said they expect the bid price to be raised to at least 11.5 euros.

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

Creval has said the tax incentives entail a potential 350 million euro benefit in the context of the takeover.

Creval, which is worth around 846 million euros at current market prices, will give a formal opinion on the bid only after the publication of the offer’s official prospectus.

Creval has already said it will evaluate alternatives to an offer that was neither expected nor agreed. Sources have said it is preparing to fight to get shareholders a higher price.

Some Creval shareholders have already rejected the offer as too low.

$1 = 0.8252 euros Reporting by Giuseppe Fonte, editing by Valentina Za and Jane Merriman