MILAN, May 6 (Reuters) - Bailed-out Italian bank Monte dei Paschi on Thursday said it faced a smaller-than-expected capital shortfall and pushed back capital strengthening plans to the first half of 2022 at the latest.

The state-owned bank had said it would seek a merger with a stronger peer or raise 2.5 billion euros in cash by the end of the third quarter to address a gap in its regulatory capital.

In reporting a higher-than-expected 119 million euro net profit for January-March and the best quarterly operating profit in three years, the bank said it had not incurred an expected 300 million euro capital shortfall in the period.

Over the longer term, Monte dei Paschi said it now expected a capital shortfall of less than 1 billion euros as of March 31, 2022, down from an earlier 1.5 billion euro forecast.

In any case, the shortfall will not affect its best-quality capital, the bank said.

"Despite the smaller-than-expected (capital) shortfall, the capital strengthening estimate of 2.5 billion euros has not been changed, pending the outcome of (European banking) stress tests that will be communicated to the market in July," Monte dei Paschi said.

The bank said it was also still awaiting a decision from European competition authorities which must assess its "stand-alone viability" before allowing Rome to pump more money into the Tuscan lender as part of a merger or a cash call.

At the moment there is no "significant progress" in discussion with Brussels, Monte dei Paschi said, after it submitted offsetting measures for failing to reach restructuring targets agreed at the time of the 2017 bailout.

"Pending developments in talks with Competition authorities, we believe the capital strengthening transaction ... could happen in the fourth quarter 2021 or the fist half of 2022," the bank said.

(Reporting by Valentina Za; Editing by Dan Grebler, Kirsten Donovan)