By Valentina Za

Italian state-owned bank Banca Monte dei Paschi di Siena has received a preliminary green light from European Union competition authorities for a long-awaited bad debt clean-up plan.

Italy had been in talks for months with the European Commission over ways to rid Monte dei Paschi of most of its problem loans and allow an eventual re-privatisation of the lender, which was rescued in 2017 in an 8 billion euro bailout.

Confirming what a source had told Reuters earlier on Friday, Monte dei Paschi said it was discussing the scheme with the European Central Bank and Italian market regulator Consob following the informal EU approval.

The plan should allow it to offload a "significant portion" of its impaired loans, it said.

EU Competition chief Margrethe Vestager confirmed Italy's plan for Monte dei Paschi did not constitute state aid, meaning it should not clash with EU rules.

Italy's Treasury, which owns 68% of the Tuscan lender, had been seeking to help it reduce impaired loans to around 5% of total lending to make it a more an attractive merger partner, without imposing excessive losses on the fragile bank.

To shed the problem loans, Monte dei Paschi will de-merge a part of its balance sheet comprising the soured debt on the asset side and a portion of its capital as well as debt.

Rome must present an exit strategy for Monte dei Paschi, which is expected next year.

Earlier this month, outgoing Monte dei Paschi CEO Marco Morelli said the pandemic made it imperative to renegotiate the bank's restructuring plan and that may include an extension, but it would be best to find a solution for the bank as quickly as possible.

Shares in the bank were up 13.3% by 1445 GMT.

Italian daily MF first reported news of the EU antitrust approval.

(Reporting by Valentina Za in Milan, additional reporting by Foo Yun Chee in Brussels and Giuseppe Fonte in Rome, writing by Agnieszka Flak, editing by Susan Fenton and Barbara Lewis)