SIENA, Italy, April 15 (Reuters) - Shareholders in Monte dei Paschi di Siena vote on Wednesday to decide a boardroom battle pitting ousted boss Luigi Lovaglio against a rival CEO candidate picked by the bank's outgoing directors, Fabrizio Palermo.

The CEO contest at Monte dei Paschi (MPS) could shape the next phase of consolidation in Italy's banking sector, as Lovaglio has repeatedly said he was preparing for further mergers and acquisitions by the bank.

Rescued by the state in 2017 and re-privatised in 2023-2024, MPS last year took over Mediobanca to become the main investor in insurance group Generali, a trophy asset in Italian finance.

INTEGRATION OF MEDIOBANCA, MPS A KEY ISSUE

Lovaglio fell out with other directors and with leading MPS and Generali shareholder Francesco Gaetano Caltagirone after securing board approval for the plan to merge Mediobanca into MPS, sources have previously told Reuters.

Caltagirone has denied any direct clash with Lovaglio, saying the disagreements are within the board.

After stripping Lovaglio of his powers last month and ruling him out for a new mandate, the MPS board selected Palermo, the current CEO of utility ACEA, as the best of three candidates it had initially proposed as an alternative to Lovaglio.

Palermo's lack of expertise in commercial banking and the confusion around the CEO renewal process have raised alarm at the European Central Bank, which has the power to hike capital demands to sanction perceived governance weaknesses, sources have previously told Reuters.

Approved by the boards of both banks and discussed with the ECB, the plan to merge Mediobanca into MPS requires shareholder approval. A change of CEO at MPS could delay that vote, a person close to the matter told Reuters.

Italian media have reported that Palermo said in investor meetings it was important to preserve Mediobanca's autonomy even with the plan going ahead.

BACKERS FOR RIVAL CANDIDATES LINE UP

Leading governance advisers International Shareholder Services (ISS) and Glass Lewis have backed the board's slate of nominees led by Palermo, urging however a vote against Chair Nicola Maione and the head of the nominations committee for the chaos around the CEO succession process.

Under complex new governance rules which MPS is the first Italian company to test, the Palermo-led slate would be subject to a second round of individual votes if it comes on top. If the Lovaglio-led slate wins, it will not.

Among MPS' main domestic shareholders, Caltagirone, who last year appointed Palermo to the Generali board, will back him at MPS with a stake of 13.5%, a person with direct knowledge of the matter said.

Delfin, the main MPS investor with 17.5%, has not disclosed its stance. The Treasury, which owns almost 5%, will abstain. The biggest institutional investor, Norges Bank, with a stake of just under 3%, has said it will back Lovaglio.

(Reporting by Valentina Za; Editing by Jan Harvey)

By Valentina Za