UPDATE 2-Italy working on tax measure to help Monte dei Paschi tie-up -sources

* Measures would mean earnings boost of 3 bln euros for MPS

* MPS’s pending legal disputes are main hurdle to a sale

* Govt has already set aside 1.5 bln euros for re-privatisation (Adds impact on state finances)

ROME, Nov 12 (Reuters) - Italy is readying measures to help corporate tie-ups through tax breaks, a draft document seen by Reuters showed, as Rome strives to find a merger partner for ailing state-owned bank Monte dei Paschi di Siena.

Under the scheme, expected to be approved as part of the 2021 budget law, two companies merging during the course of next year would be able to lower their tax burden by using so-called deferred tax assets (DTAs).

The measure is aimed at easing the re-privatisation of Monte dei Paschi (MPS), two sources familiar with the matter said. The Treasury owns 68% of the bank following a 2017 bailout.

The document sets a ceiling for the tax benefit equal to 2% of the value of the assets of the smaller of the two companies merging.

For MPS this would mean an earnings boost of around 3 billion euros ($3.54 billion) in the case of a tie-up with a bigger peer.

MPS has written off the value of its DTAs, meaning the buyer would also reap a similar capital boost, one of the sources said.

The measure’s impact on state coffers in terms of lower revenues is estimated at almost 2 billion euros in the next two years, the draft says.

The Treasury is struggling to find buyers for Monte dei Paschi, which is weighed down by bad loans and pending legal disputes following decades of mismanagement. It had initially targeted Banco BPM to create a third large banking group in the country, next to Intesa Sanpaolo and UniCredit.

Sources have said that recently the Treasury has been focusing on Unicredit as a more likely merger partner.

However all potential buyers seem wary of taking on MPS despite the Treasury’s efforts to help it to shed most of its problem loans through a transaction due to close by Dec. 1.

MPS’s legal risks are the main hurdle to a sale, sources have said.

The recent conviction of two former top executives has complicated matters by forcing MPS to increase provisions against legal risks, further straining the bank’s finances at a time when the pandemic is stoking loan losses.

Rome has set aside 1.5 billion euros to help Monte dei Paschi’s re-privatisation. But CEO Guido Bastianini has projected a capital shortfall of 2 billion euros by the first quarter of next year. (Reporting by Giuseppe Fonte and Valentina Za, editing by Gavin Jones, Elaine Hardcastle and Nick Macfie)