UPDATE 2-Italy's Treasury to repel 5-Star attempt to curb bank merger boost

* Treasury sponsored measures to facilitate corporate tie-ups

* Scheme entails 2.4 bln euro gain for MPS buyer

* Rome identified UniCredit as best option to take on lender (Adds details, 5-Star lawmaker and background)

ROME, Dec 16 (Reuters) - Italy’s Treasury is set to fend off the co-ruling 5-Star Movement’s attempt to limit tax breaks designed to spur bank mergers and attract a potential buyer for state-owned Monte dei Paschi(MPS), lawmakers told Reuters.

The tax breaks, due to be approved by parliament by the end of the year as part of the 2021 budget, allow banks merging next year to lower their tax burden by using past tax losses (DTA).

In its current formulation, the scheme would entail a 2.4-billion euro ($2.9 billion) capital boost for a potential buyer of loss-making MPS.

Economy Minister Roberto Gualtieri is counting on the tax measure to pave the way for an MPS merger, which would allow the Treasury to cut its majority stake in the bank as it pledged to do in 2017 to secure European Union approval for the bank’s rescue.

Five-Star members oppose re-privatising MPS, at least in the short term, and have filed several proposals to limit the benefits produced by the tax break measure.

But the lawmakers said Gualtieri, a prominent member of 5-Star’s coalition partner the Democratic Party (PD), had told them he had no intention of amending it.

“The most likely end result is that parliament would have to somehow get involved when there’s a large merger deal that benefits from the tax breaks,” 5-Star lawmaker Giovanni Curro told Reuters.

Italy’s chamber of deputies plans to approve the 2021 budget early next week.

Analysts see the tax measure as a powerful catalyst for bank mergers next year.

The scheme has implications for a takeover bid by Credit Agricole Italia for Creval, which the Italian bank is expected to fight off as too low due to the fact that it does not reflect the DTA benefit.

The Treasury had identified UniCredit as the ideal buyer for MPS but talks have been complicated by Jean Pierre Mustier’s unexpected decision to step down as UniCredit CEO.

$1 = 0.8197 euros Additonal reporting by Valentina Za; Editing by David Goodman/Angus MacSwan/Jane Merriman