By Giuseppe Fonte and Valentina Za

ROME (Reuters) -Italy has been asked to provide more than 7 billion euros ($8 billion) in capital to UniCredit to strike a deal over Monte dei Paschi and offload as much as possible of the state-owned bank to the stronger rival, two people close to the matter said.

UniCredit, Italy’s No. 2 lender, agreed on July 29 to discuss buying selected parts of Monte dei Paschi (MPS) from Italy’s Treasury, which rescued the Tuscan bank in 2017, spending 5.4 billion euros.

Under the terms of the bailout, Italy must cut its 64% stake in MPS by mid-2022 at the latest. Negotiations between UniCredit and the Treasury have entered a crunch phase and a preliminary accord was expected in time for a UniCredit board meeting on Oct. 27 to approve third-quarter results.

However, one person involved in the discussions said that more time may be necessary and it was unclear at present whether a draft accord could be reached this month.

“Talks are in the final stretch, we need to see if the conditions exist to close the deal,” a Treasury official told Reuters, speaking anonymously due to the sensitivity of the issue.

Complicating matters for the Treasury, UniCredit agreed to enter exclusive talks over MPS only on condition an acquisition would leave its capital reserves unaffected while providing a double-digit boost to its earnings per share.

The parties have only recently started discussing capital needs, with a source saying UniCredit sent a proposal to the Treasury that envisages various scenarios depending on the portion of MPS it takes on.

The Italian press reported at the weekend that a capital injection of close to 7 billion euros was necessary if UniCredit were to take all but 300 MPS branches mostly in Italy’s poorer south, while also leaving behind the bank’s capital services unit, leasing and factoring arm, and IT centre.

UniCredit has said it is targeting MPS’ branches in Tuscany, Lombardy, Veneto and Emilia-Romagna.

But the two sources said the capital outlay would be more than 7 billion euros if UniCredit were to take on the largest possible portion of MPS.

With the structure of the deal still under discussion, it remains to be seen how UniCredit’s demands will be met. The Treasury declined to comment.

MPS’ capital raising needs investor participation to comply with EU rules on state aid, according to a copy of a confidential document detailing the transaction seen by Reuters.

With UniCredit – dubbed Uranus in the document – set to finance the MPS’ acquisition in shares, the MPS rights issue would give new investors a way into UniCredit, while the Tuscan bank’s existing shareholders, including the Treasury, are also set to become investors in UniCredit.

UniCredit’s capital requests are much higher than a 2.5 billion euro capital raising MPS has planned for next year were it to fail to find a partner.

But a fourth person close to the matter said that while securing a permanent solution to MPS’ woes was extremely costly, a smaller capital injection risked providing only a medium-term fix, adding UniCredit was ready to walk away from a deal if the terms set in July were not met.

UniCredit has said it will steer clear of legal risks stemming from mismanagement and any MPS’ problem or risky loans, which will go to state-owned bad loan manager AMCO.

The document said the legal risks, together with MPS’ assets not transferred to UniCredit or other lenders such as MCC and MPS’ historic properties in Siena, would go to Fintecna, another state agency. ($1 = 0.8637 euros)

(Reporting by Valentina Za in Milan and Giuseppe Fonte in Rome; Editing by Kirsten Donovan and Steve Orlofsky)