UPDATE 1-Italian government wins confidence vote over decree to bolster banks

(Recasts with government winning vote)

ROME, April 6 (Reuters) - Italy’s government won a confidence vote on Wednesday over a decree aimed at helping banks manage bad loans and uniting a sprawling network of small local lenders.

The legislation passed in the upper house Senate with 171 votes in favour and 105 against. It will now become law, having been approved by the lower house.

Parliamentary Relations Minister Maria Elena Boschi had called the vote to speed passage of the emergency decree, which would have expired this week without parliamentary approval.

The decree sets up a guarantee scheme aimed at helping banks and other financial institutions to offload some of the 200 billion euros ($227 billion) in bad loans that piled up on their balance sheets during three years of recession.

The plan, agreed after months of talks with the European Commission, will let banks bundle the loans into securities that can be sold.

If the government loses a confidence vote it is obliged to resign, but defeat was extremely unlikely in this case.

Prime Minister Matteo Renzi, who has only a narrow majority in the Senate, can normally rely on the support of defectors from the crumbling centre-right party of former prime minister Silvio Berlusconi to ensure passage of important legislation.

The decree also contains measures to pull together under a holding company the 371 credit cooperatives that are fragments in an unwieldy and expensive system.

Credit cooperatives with assets worth at least 200 million euros, or that choose to make partnerships with lenders of that size, will be able to opt out of the new structure.

The planned holding company will have capital of at least a billion euros and the Treasury will be able to sell off some of its share if it needed to raise funds on the market. ($1 = 0.8813 euros) (Reporting by Steve Scherer and Isla Binnie; Editing by Janet Lawrence)