Bank of Italy's Deputy Governor Fabio Panetta told a parliamentary hearing that a merger was the best solution for Carige, which faces a state bailout if it fails to find a buyer.

The European Central Bank put Carige under special administration this month after its top shareholder blocked a planned capital raising in December.

Italy's government has set up a 1.3 billion euro fund to prop up the bank and has granted it a state guarantee to sell debt. But it could also be called to inject capital under a so-called precautionary recapitalisation scheme.

Italy's Economy Minister Giovanni Tria said on Wednesday a market solution for Carige was preferable, but the government was ready to deal with other situations.

Rome is considering merging Carige, and fellow troubled lender Monte dei Paschi, with stronger rivals, sources familiar with the matter have told Reuters.

UBS is helping Carige look for a buyer, but the bank's chief executive said earlier this month that crucial elements such as its cost of capital were still unclear.

Panetta said Carige had strengths that could be exploited by a buyer, such as a total capital ratio of 12-13 percent which could rise to 17-18 percent if it were taken over by another bank, due to a different assessment of asset risks.

"So looking for a partner is not a fanciful thought".

(Reporting by Stefano Bernabei and Giuseppe Fonte, writing by Giulio Piovaccari, editing by Alexander Smith)