Credit Agricole working with DB, Rothschild on possible Banco BPM deal, sources say

MILAN (Reuters) - Credit Agricole has been working with Deutsche Bank and Rothschild on a potential merger deal of its Italian arm with Banco BPM, three sources said.

Banco BPM is weighing tie-up options after escaping a takeover attempt by bigger rival UniCredit, amid a wave of consolidation reshaping Italy's banking sector.

Banco BPM Chief Executive Giuseppe Castagna said on Thursday that a deal with Credit Agricole Italia was the "clearest option" for his group and would be beneficial for the country's economy.

Credit Agricole is a long-standing BPM commercial partner and the single largest shareholder in the Italian lender, with a stake of just above 20%.

That stake could rise to 35% following a combination of Credit Agricole's Italian operations and Banco BPM, a fourth person briefed on the discussions said.

Any deal needs political blessing because Italy has powers it can use to shield strategic corporate assets. Rome has opposed UniCredit's bid for BPM on national security grounds, but Credit Agricole has traditionally had a good relationship with the Italian government.

Credit Agricole, Deutsche Bank and Rothschild all declined to comment. News of the advisers was first reported by Italian daily Il Messaggero on Friday.

State-backed Monte dei Paschi di Siena remains the alternative M&A option for Banco BPM, Castagna said on Thursday.

Banco BPM owns 9% of Monte dei Paschi and the government has long sought to promote a combination of the two mid-sized banks.

The now collapsed UniCredit bid, however, derailed that plan and Monte dei Paschi has now secured control of Mediobanca, under a bid that concludes on Monday, making a three-way deal hard to pursue in the near term.

(Reporting by Valentina Za and Mathieu Rosemain; Editing by Alvise Armellini)