(Adds comment by Intesa's CEO, share price reaction)
By Lisa Jucca and Paola Arosio
MILAN, April 22 (Reuters) - Hutchison Whampoa is targeting Telecom Italia's mobile business and would not oppose a spin-off of its fixed-line network, thus removing a major political hurdle to a deal, a source familiar with the matter told Reuters.
Italy's biggest phone operator and the Hong Kong-based conglomerate are in preliminary contacts over a possible tie-up that would see Hutchison owning 29.9 percent of Telecom Italia after selling its 3 Italia mobile business to the group and buying out some other shareholders.
Yet some Italian politicians have voiced their opposition to the idea of a foreign company ending up owning the country's fixed line telecoms network, considered a strategic national asset over which the Treasury has veto powers.
"The Chinese want to do this deal on the third and fourth generation mobile business. They are not interested in the fixed-line business," the source said.
If Telecom Italia was to carve out its fixed line network, "there should not be any political hurdles to the Chinese possibly taking over control (of Telecom Italia)," the source added.
Shares in Telecom Italia were up 2 percent at 0.5785 euros by 1349 GMT, off an earlier high for the session of 0.5855 euros.
Telecom Italia is currently assessing the feasibility of spinning off the fixed-line network, which analysts value at between 12 billion euros and 15 billion euros ($16-20 billion).
Analysts at Nomura said earlier in April Hutchison's interest in Telecom Italia might evaporate if the cash generating network is not included in any merger deal.
Several sources close to the situation said last week state-owned fund Cassa Depositi e Prestiti is the frontrunner to take a significant minority stake in the network business, which would take on a portion of Telecom Italia's debt, now exceeding 28 billion euros.
Meanwhile a valuation still needs to be agreed for 3 Italia, considered the weakest of Italy's four mobile operators, competing against Telecom Italia Mobile (TIM), Vodafone and Vimpelcom's Wind. Analysts reckon it could still be worth 1.5 to 2 billion euros.
The source said that a valuation of 1.5 billion euros for 3 Italia was "reasonable".
Taking on 3 Italia makes strategic sense for Telecom Italia as the deal would generate significant cost synergies and eliminate a competitor in a sector that is struggling under falling margins and a deep economic recession in Italy.
The new mobile group, which would end up with a market share of about 45 percent, will inevitably face antitrust concerns. But the competition remedies Telecom Italia is likely to face are not big enough to stifle a deal, the source said.
"This (the antitrust issue) is not a big problem even though the procedure is complex. The mobile phone market is very competitive, even without 3 Italia," the source said. "The main problem is the valuation of 3 Italia."
Telecom Italia declined to comment while a spokesman for Hutchison in Hong Kong would only say that "contacts between Telecom Italia and 3 Italia on possible business combinations are still very preliminary and of an exploratory nature."
A spokeswoman for Italy's competition regulator said the watchdog does not comment on prospective deals.
The source also dismissed media reports saying Hutchison would end up with a maximum 10 percent stake in Telecom Italia.
"The Chinese do not want a minority stake in Telecom, they want control. The 10 percent of Telecom Italia is what 3 Italia may be worth after an asset swap. Hutchison would buy the rest," said the source.
That 10 percent implies a valuation for Telecom Italia shares of close to 1.2 euros, equivalent to the book value of the stock in the accounts of the main shareholding consortium Telco and nearly twice the current market price.
Earlier in April Telecom Italia asked a committee of directors led by Chairman Franco Bernabe to determine whether to go ahead with formal merger talks with Hutchison.
The source said a decision on whether to open formal talks is expected by a May 8 Telecom Italia board meeting on results.
The board is controlled by representatives of Telco, a shell company owned by Italian banks Mediobanca and IntesaSanpaolo, Italian insurer Generali and Spanish telecoms rival Telefonica.
Intesa's chief executive Enrico Cucchiani said on Monday that an offer from Hutchison could be interesting and needed to be evaluated carefully before taking any decision.
"As for all offers it would be irresponsible and unprofessional not to do so," Cucchiani said at his bank's annual shareholder meeting in Turin.
Telco is the biggest shareholder in Telecom Italia with a 22.4 percent stake, followed by investor Marco Fossati with nearly 5 percent. ($1=0.7644 euros) (Additional reporting by Gianluca Semeraro in Turin; Editing by Greg Mahlich)