By Valentina Za

MILAN (Reuters) -UniCredit Chief Executive Andrea Orcel vowed on Tuesday to gradually reduce the stake his bank has built in the country's top insurer Generali, ruling out large insurance deals for the group.

UniCredit has built a 6.7% stake in Generali, calling it a financial investment.

However, with a consolidation wave sweeping Italian finance and Orcel's plays on Commerzbank and Banco BPM running into trouble, speculation had mounted about whether Orcel could target the insurer under his merger and acquisition strategy.

Speaking at a conference organised by rival Mediobanca, Orcel said building stakes in a target company as a first step towards potential tie-ups could be a good strategy, given widespread government hostility across Europe to bank M&A.

However, "I want to be very clear, the investment in Generali is not that," Orcel said. "We will be reducing it and exiting it over time."

UniCredit is in the process of internalising its life insurance business and it is very likely to apply for the regulatory status of financial conglomerate, which allows banks with insurance units to benefit from favourable capital rules known as the 'Danish Compromise'.

He ruled out UniCredit pursuing major deals in insurance, and said it could instead do small, or 'bolt-on', acquisitions to widen its product capabilities.

Orcel, a former investment banker, said UniCredit was committed to returning to its investors by 2027 the cash it holds in excess of a self-imposed capital threshold, which currently amounts to some 10 billion euros ($11.6 billion).

Orcel said his preference, and probably also that of bank supervisors, would be to use the cash for value-adding transactions.

However, conditions Orcel has set to pursue M&A deals are strict and he said that the terms the Italian government has imposed on UniCredit's bid for Banco BPM, combined with the lack of significant progress in UniCredit's interaction with Rome, meant the chances it could go through were well below 50%.

($1 = 0.8652 euros)

(Reporting by Valentina Za, editing by Gavin Jones)