ROME, May 3 (Reuters) - Italy is considering extending to mid-2022 tax breaks aimed at spurring tie-ups in the country's fragmented banking sector, a draft decree seen by Reuters showed.

The tax breaks, which are currently set to expire at the end of this year, are a key part of incentives the government has been working on to convince Italy's no.2 bank UniCredit to take over loss-making rival Monte dei Paschi .

The draft decree also proposes boosting the size of the incentives by setting the cap on the tax breaks at 3% of the assets of the smaller company involved in the merger, from 2% at present. (Reporting Giuseppe Fonte and Valentina Za; editing by Gavin Jones)