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Italy's Treasury open to asset sales in search for MPS solution -sources

* Rome open to all options that safeguard MPS viability

* Merger deal with UniCredit still elusive

* Legal risks, fragile performance make MPS unattractive

ROME, June 23 (Reuters) - Italy’s Treasury is reviewing options to offload Monte dei Paschi (MPS), including making it easier for a buyer to spin-off some of the ailing bank’s assets, three sources told Reuters.

Political infighting last month forced Rome to drop a costly Treasury scheme aimed at easing a sale of MPS to UniCredit, Italy’s second-largest bank.

And results from a Europe-wide banking stress tests due at the end of July are expected to highlight the fragility of MPS, four years after a bailout that cost taxpayers 5.4 billion euros ($6.5 billion) and handed the Italian state its current 64% stake.

Despite a bad loan clean-up to prepare for a sale, ongoing legal risks totalling 10 billion euros and a weak operating performance make MPS an unattractive target.

While a deal remains elusive, Rome is open to all options that safeguard the viability of MPS, the three sources said, adding that these include helping a buyer carve out assets after taking on MPS, or first reducing its size to ease a takeover.

However, the Treasury is not working on a break-up for now, and has not begun formal talks with potential buyers of MPS assets, two of the sources close to the matter said.

The Treasury continued to favour selling MPS to a single, suitable buyer, such as UniCredit, where the hiving off of assets could also come into play, the two sources added.

While the Treasury is continuing discussions with UniCredit, its new Chief Executive Andrea Orcel is focused on a recently launched internal reorganisation and a new business plan.

Both MPS and UniCredit declined to comment.

The merger incentives the Treasury has dropped would have allowed UniCredit to take over in stages both Banco BPM , which has roots in Italy’s wealthy north, and MPS.

However, the incentives were estimated to come at a cost of more than 1 billion euros and key government figures would prefer to make use of any budgetary leeway to help pandemic-stricken companies, a senior lawmaker told Reuters.

In addition to their cost, the measures also met political resistance because some in government favour the creation of a third large banking group, next to UniCredit and Intesa Sanpaolo , built around Banco BPM, a minister told Reuters.

A fourth person briefed on talks said state-controlled MedioCredito Centrale (MCC), BPER Banca and Banco BPM may all be involved in buying MPS assets.

MCC CEO Bernardo Mattarella said in a newspaper interview in May his bank was ready to help in finding a solution for MPS by taking on branches in southern Italy. BPER and Banco BPM both declined to comment.

MPS now plans to raise 2.5 billion euros in capital and has said it will strive to plug the hole in the context of the proposed merger with a stronger bank.

The last word on the fate of MPS lies with Prime Minister Mario Draghi. Sources say the former European Central Bank chief has not yet been engaged in attempts to resolve its problems. ($1 = 0.8371 euros) (Reporting by Giuseppe Fonte in Rome, Valentina Za and Andrea Mandala in Milan and Pamela Barbaglia in London Editing by Alexander Smith)

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