UPDATE 1-Italy in contact with Carige over buying bad loans - source

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MILAN, Jan 4 (Reuters) - The Italian government has had preliminary contacts with Banca Carige over potentially buying the troubled bank’s bad loans to try to revive its fortunes, a source close to the matter told Reuters on Friday.

A state-backed bailout of the Genoa-based lender could prove difficult for the populist ruling parties that came to power last year campaigning against taxpayer funded rescues of banks.

“It’s just a preliminary approach, nothing formal, there is not yet any negotiation,” the source said, adding any purchase of bad loans would be done through the Treasury’s “bad bank”.

Under previous centre-left governments, Italy bailed out Monte dei Paschi di Siena in 2016 and bankrolled the rescue of two smaller lenders based in the Veneto region by Intesa Sanpaolo in 2017.

Daily Il Messaggero reported on Friday the Treasury was in talks with Carige to buy soured loans and help clean up its balance sheet as a way of making the lender more attractive to a potential merger partner. .

Soured loans at Italy’s 10th largest bank amounted to 3.5 billion euros ($1.1 billion) at the end of the third quarter.

On Wednesday, the European Central Bank picked three administrators to take charge of Carige and try to save the bank after it failed to raise new capital.

The lender said the administrators would continue working on ways to strengthen its capital, shed soured loans and find a merger partner.

Fabio Innocenzi, one of the administrators and until recently chief executive of the bank, said on Thursday Carige was in an exploratory phase with regards to a merger.

Newspapers have spoken about interest in Carige from a series of Italian banks including Monte dei Paschi.

But a source who was involved in the rescue of Monte dei Paschi said the Tuscan lender, currently 68 percent owned by the Treasury, could not buy another bank because of a commitment made to European Union regulators not to do merger deals.

It would also amount to state aid, the source said.

($1 = 0.8770 euros)

Reporting by Andrea Mandalà; Additional reporting by Paola Arosio; Writing by Giulio Piovaccari; Editing by Silvia Aloisi and Mark Potter