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UPDATE 1-Monte dei Paschi agrees 3.8 bln euro deal to cut legal claims

(Merges stories, adds context)

MILAN, July 21 (Reuters) - Italy’s Monte dei Paschi (MPS) and its former top investor said on Wednesday they had reached a preliminary accord to settle their legal disputes, marking a big step forward in Rome’s efforts to reprivatise the ailing bank.

Some 10 billion euros in legal risks weighing on MPS pose one of the main hurdles to Italian Treasury’s plans to cut its 64% stake in the Tuscan bank by mid-2022, as agreed as part of a 2017 state bailout.

A large chunk of the legal risks stem from 3.8 billion euros ($4.5 billion) in extra-judicial claims filed last summer by MPS’ former top investor, local banking foundation Fondazione Monte dei Paschi.

The foundation had sought damages after draining its coffers to back a string of cash calls at MPS in 2011, 2014 and 2015 following the ill-fated acquisition of rival lender Banca Antonoveneta in 2008.

“The preliminary agreement allows the bank to reduce claims by...3.8 billion (euros), giving a significant contribution to solving the main element of uncertainty weighing on the bank’s balance sheet,” MPS and the foundation said in a joint statement.

As part of the transaction, MPS will pay the foundation 150 million euros. A final deal to end any pending disputes will be submitted for approval to the lender’s board on Aug. 5.

To ease the bank’s re-privatisation, Rome is working to help MPS more than halve its legal claims, by dismissing some and settling others, a source close to the matter said on Wednesday.

The Treasury and advisers Bank of America and Orrick have also devised a complex scheme to shield potential buyers from residual risks after any settlement agreements.

Under the Treasury-sponsored plan, such risks are to be spun off to a state-controlled entity, the source said.

The Treasury has been working to offload MPS to healthier rival UniCredit. Despite the lack of significant progress in protracted negotiations, the Treasury still sees UniCredit as the best option for an MPS takeover, Reuters reported on Wednesday.

$1 = 0.8480 euros Reporting by Giulio Piovaccari in Milan and Giuseppe Fonte in Rome; editing by Valentina Za and Angus MacSwan

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