The board of state-owned MPS is due to meet in the afternoon to set the terms of a new share sale to raise up to 2.5 billion euros ($2.4 billion), its seventh share issue in 14 years.

Speaking on condition of anonymity because discussions are private, the two sources said the signing of the contract would require "a few more hours".

MPS needs money to lay off 3,500 staff by the end of the year through a costly early retirement scheme, and also to offset an up to 500 million euro capital shortfall that could emerge next year.

Rocky markets and the size of the cash call, equivalent to more than 10 times MPS' current market value, have complicated talks between the lender and the eight banks that had taken a preliminary commitment to underwrite the issue.

The new shares will value MPS above healthier peers, exposing underwriters to likely losses on any shares left on their books, bankers and analysts say.

Further irking lenders, MPS' Chief Executive Luigi Lovaglio has stalled on an offer by asset manager Anima Holding to buy into the issue as part of a new commercial agreement with MPS.

The group of banks has long seen the share sale as too risky to bring to the market without a pre-committed core of investors.

Lovaglio can at least count on the backing of France's AXA, MPS' partner in an insurance joint-venture, which has offered to put in at least 100 million euros, according to sources.

MPS raised 8 billion euros mostly from taxpayers but also from private investors to avoid liquidation back in 2017.

Based on its 64% stake in the lender, Rome can pump up to 1.6 billion euros into MPS to cover the new capital raise, but the rest must come from private hands due to European Union rules on state aid to lenders. ($1 = 1.0302 euros)

(Reporting by Valentina Za in Milan and Giuseppe Fonte in Rome; Editing by Keith Weir)

By Valentina Za and Giuseppe Fonte