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Italy tackles Monte Paschi's legal risks in privatisation push - sources

* Treasury mulls scheme to shift legal risks to state entity

* Incentives include tax measures, capital injection

* Awaiting pitches by Tuesday from privatisation advisers

* Aims to identify healthy peer as buyer by year-end

ROME, Nov 16 (Reuters) - Italy’s Treasury is working on a package of incentives to entice potential buyers for Monte dei Paschi, including a scheme to hive off pending legal disputes that hamper a sale of the bailed-out bank, three sources familiar with the matter said.

Defying political and union opposition, the Treasury is pushing ahead with plans to cut its 68% in the Tuscan bank as it pledged to do in 2017 to gain European Union approval for an 8 billion euro ($9.5 billion) rescue.

Following years of mismanagement, Monte dei Paschi (MPS) faces 10 billion euros in legal claims from shareholders left out of pocket by a string of share sales over the past decade.

Sources have said MPS, whose market value has shrunk to 1.3 billion euros, needs at least 2 billion euros in capital after it flagged a prospective shortfall.

The Treasury last week sent out requests for proposals to hire financial and legal advisers to cut its MPS stake.

The sources said the Treasury was considering a scheme to transfer legal risks to another state-owned entity together with nearly 1 billion euros in cash MPS holds against those risks.

The Treasury, which has already earmarked 1.5 billion euros to help MPS, would step in to fill in the ensuing capital gap.

The Treasury declined to comment.

Fintecna, a financial holding company controlled by state lender Cassa Depositi e Prestiti (CDP), is seen as a possible candidate to take on MPS’ legal risks.

One of the sources said transferring the risks to a newly-created company was also a possibility and deliberations were ongoing to find a solution compliant with EU state aid laws.

Under Italian law, MPS would be liable for the claims if the entity that has taken them on had insufficient funds to meet its obligations. However, the state backing should solve the issue.

The legal risk clean-up would follow a scheme the Treasury used to rid MPS of most of its impaired loans with the help of state-owned bad loan manager AMCO. That transaction, which is due to complete by Dec. 1, requires 1.1 billion euros in MPS’ equity.

To elicit interest for a cleaned-up MPS, Italy has included in the 2021 draft budget a tax measure giving the buyer a 3 billion euro earnings and capital boost in case of a merger. ($1 = 0.8447 euros) (Reporting by Giuseppe Fonte and Valentina Za, additional reporting by Pamela Barbaglia in London. Editing by Jane Merriman)