Monte dei Paschi board meets over capital measures as merger remains elusive

* Must submit plan to rebuild capital to ECB

* UniCredit CEO change hampered merger contacts

* Treasury confident of securing buyer

MILAN, Jan 28 (Reuters) - The board of Italian state-controlled bank Monte dei Paschi met on Thursday to discuss ways to raise cash and ensure business continuity, sources said, with a proposed merger favoured by the government remaining elusive.

Italy’s Treasury, which must cut the 64% stake in Monte dei Paschi (MPS) it owns following a 2017 bailout, has been working to find a buyer for the loss-making bank which faces an up to 2.5 billion euro ($3 billion) capital shortfall over the medium term.

Rome had hoped informal contacts with UniCredit would lead to the signing of a confidentiality accord this month to kick off talks with a view to reaching an agreement by April, two sources familiar with the matter said.

But negotiations have stalled due to a change at the helm of UniCredit where CEO Jean Pierre Mustier will step down next month, only being replaced after mid-April by former UBS investment banker Andrea Orcel.

UniCredit, Italy’s No.2 bank, has picked its new CEO while the Rome government is mired in a crisis after the desertion of a junior coalition partner prompted Prime Minister Giuseppe Conte to resign.

Meanwhile, MPS must tell European supervisors by the end of January how it plans to rebuild its capital buffers.

Its reserves have been depleted by a bad loan clean-up engineered by the Treasury to ease the sale of the bank, and the setting aside of funds for any legal claims following the convictions of former executives.

The sources said the Treasury was hoping to win more time from the European Central Bank to keep working towards a merger later this year.

But MPS’ top management has been lobbying for an immediate recapitalisation, first proposing the sale of 500 million euros in hybrid debt and now a new share issue, a third source said separately.

However, MPS is expected to approve only a rough outline of capital-raising measures on Thursday, engaging in a dialogue with the regulator as well as European Union competition authorities over future steps, one of the first two sources said. MPS declined to comment.

Rome has put together a package to entice buyers, approving tax benefits for mergers in 2021 and studying a new bad loan scheme involving state-owned loan manager AMCO. It also has 1.5 billion euros ready to inject into MPS.

No suitor however has yet entered a data room set up 10 days ago to provide access to MPS’ books. ($1 = 0.8266 euros) (Reporting by Valentina Za in Milan and Giuseppe Fonte in Rome; Editing by Kirsten Donovan)