ROME, Aug 10 (Reuters) - A deal under discussion for UniCredit to buy parts of Monte dei Paschi involves the larger Italian bank assuming liability for its target's so-called junior bonds, two people close to the matter told Reuters on Tuesday.

Investors in the subordinated bonds, which have lesser rights to repayment in the event of their issuer getting into problems, were concerned that they would lose out in a takeover of the Tuscan bank, which was bailed out by the state in 2017.

UniCredit agreed last month to enter talks over a possible acquisition of Monte dei Paschi (MPS), of which the Rome-based Treasury owns 64% following the bailout.

The prospect of a sale hit the value of the junior bonds because investors worried European Union rules designed to shield taxpayers would require them to bear losses before the state could spend more money to facilitate a deal.

However, sources directly involved in the negotiation have told Reuters that Rome is working to shield bondholders from losses by agreeing a final deal on terms that do not require applying EU rules on state aid for banks.

UniCredit's CEO Andrea Orcel said at the time that the MPS talks were confirmed that it was too early to say what would happen to the bonds, but the two sources said it was poised to take on the junior bonds.

UniCredit declined to comment.

A third source close to the negotiations said the parties had yet to discuss how it would work in practice and various options were being considered.

Credit rating agency DBRS on Monday downgraded MPS' subordinated debt on rising risks for its holders, sending yields higher.

By 1417 GMT the yield on a subordinated bond due in January 2030 was 11.4% up a percentage point from Monday.

The parties have agreed on a 40-day period of exclusivity during which UniCredit is selecting the parts it will buy, in line with the strict conditions it has set to consider a deal.

UniCredit has demanded the deal leave its capital unaffected, while boosting its earnings per share by at least 10%. It has said it will not take on any problem loans and can leave any performing loans it deems risky. Non-ordinary legal risks will also remain with the Italian state. (Reporting by Giuseppe Fonte in Rome and Valentina Za in Milan; Editing by Alexander Smith)