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UPDATE 2-Italy pursuing January cure to $3 bln Monte dei Paschi headache

* MPS says it needs 2.0-2.5 bln euros in capital

* Board to approve on Jan. 19 plan to raise capital

* Treasury had been discussing tie-up with UniCredit

* Treasury confident process towards deal can kick off in Jan (Adds details, context)

By Valentina Za, Giuseppe Fonte and Stefano Bernabei

MILAN/ROME, Dec 17 (Reuters) - Italy’s Monte dei Paschi (MPS) said it would approve a plan to meet capital needs totalling up to 2.5 billion euros ($3.1 bln) in mid-January, as Rome scrambles to find a merger partner for the state-owned bank.

The Italian Treasury has been discussing a possible tie-up with UniCredit and three sources familiar with the matter said a deal was still on the cards, despite the decision of the larger bank’s CEO Jean Pierre Mustier to quit in April.

The Treasury was confident it could kick off in January a process that would lead to a deal, one of the sources said, adding that reaching an agreement would require more time.

If talks with UniCredit were to fail, the Treasury has a Plan B ready, sources have said, without disclosing details.

Rome pumped 5.4 billion euros into MPS as part of a 2017 rescue for Italy’s oldest bank and must cut its 64% stake under the terms of the bailout agreed with Brussels.

Finding a solution has become imperative after MPS last month warned its capital ratios would breach minimum thresholds, and the European Central Bank told it to clarify by the end of January how it plans to fill the shortfall.

MPS said its board would meet on Jan. 19 to approve the plan requested by the ECB, under which the bank’s capital needs will be set at between 2.0 billion and 2.5 billion euros.

Under a separate five-year plan approved by MPS on Thursday, it expects to cut a net 2,670 jobs and return to profit in 2023.

The Treasury will discuss this plan with the European Commission, which must clear any further use of state money.

Rome has set aside 1.5 billion euros, but the sources said it was not clear how much of the bank’s capital needs the Italian government would be able to cover.

That is crucial because UniCredit has made clear it would not agree to a deal that reduces its capital buffers, one of the sources told Reuters.

In the final push after two years working to rid MPS of most of its problem loans, the Treasury last month hired Bank of America and Orrick to help it cut its holding.

The advisers are looking in detail at MPS’ numbers before negotiations enter a crunch phase, two of the people said.

The bank’s capital reserves are set to be eroded by a bad loan clean-up, which will close by the year-end, and provisions against pending lawsuits booked in the third quarter after years of mismanagement and the conviction of former executives.

The Treasury has also devised tax breaks for companies merging in 2021, which would entail a net 2.4 billion euro boost for an MPS buyer. ($1 = 0.8155 euros) (Reporting by Valentina Za in Milan, Giuseppe Fonte and Stefano Bernabei in Rome; Editing by Giulia Segreti, Jane Merriman and Alexander Smith)

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