Italy gives green light to Monte dei Paschi reprivatisation decree -source

* Italy struggling to find buyer for Monte dei Paschi

* Co-ruling 5-Star seeking delay of state’s exit

* Treasury opposes renegotiating deadline - sources

ROME/MILAN, Oct 18 (Reuters) - Italian Prime Minister Giuseppe Conte has given the green light to measures needed for a bad loan clean-up at Monte dei Paschi di Siena (MPS) and the eventual sale of the state-owned bank, a government official said.

Conte had delayed signing off on the long-awaited government decree, despite a request from the Treasury for speedy approval, due to pressure from the co-ruling 5-Star Movement.

The Prime Minister’s office did not immediately respond to requests for comment.

The 5-Stars are seeking to delay the state’s exit from MPS, which Rome bailed out in 2017 and must re-privatise by mid-2022 to meet conditions set by the European Union.

The Treasury firmly opposes negotiating an extension with the EU given that the final deadline is nearly two years away, two senior government officials have told Reuters.

The decree authorises the Treasury to help the bank shed 8.1 billion euros ($9.5 billion) in problem debts and lists three options to cut the state’s 68% stake - a merger, one or more share-offerings and a tender.

The bad loan clean-up, aimed at making MPS a more attractive takeover target, must be completed by Dec. 1. The Treasury had hoped to find a buyer for the loss-making bank this year to raise the necessary capital for the debt operation in the context of a merger.

The European Central Bank has set strict conditions to allow the off-loading of the bad loans, demanding MPS issues a costly ‘Tier 1’ bond to boost its regulatory capital.

Two people familiar with the matter told Reuters the bond issue was slated for 2021. The bank currently lacks the capital reserves needed to issue such debt, one of the two people added, and MPS must prove to the ECB in December that it can find buyers for the bond.

Analysts however say MPS can ill afford to sustain the cost of such an issue after paying 8.5% in September for a Tier 2 bond, also sold to meet the conditions laid down by the ECB.

Both UniCredit and Banco BPM, the two banks the Treasury has targeted as potential buyers for Monte dei Paschi, are unwilling to consider the acquisition without a state contribution to offset risks and the balance sheet impact, sources have said.

The Treasury, in turn, rules out the state fully compensating the buyer, complicating prospects for a deal.

BPM has denied any interest in MPS and UniCredit rules out mergers altogether.

$1 = 0.8534 euros Reporting by Giuseppe Fonte, Valentina Za, editing by Elvira Pollina, Kirsten Donovan