The proposed law would allow the communications watchdog to conduct a six-month inquiry into companies operating in both the telecoms and media sectors to ascertain whether they hold positions that could reduce media plurality.

The investigation would also take in companies with stakes in operators working in the two sectors, according to a draft seen by Reuters.

The European Union's top court ruled in September that an article of an Italian law setting market share thresholds to prevent an excessive concentration of power in telecoms and media was against EU rules and was unfit to protect media plurality.

That ruling strengthened Vivendi's hand in its long-running dispute with Mediaset, potentially helping the French group to regain voting rights for its full 29% stake in the Italian broadcaster. Mediaset is 44% owned by the family of Italy's former Prime Minister Silvio Berlusconi.

Vivendi is also Telecom Italia's top investor with a 24% stake.

In response to the EU ruling, which could prompt a shake-up of Italy's media and telecoms sectors, Rome said it would pursue a wider overhaul of its existing laws protecting media plurality.

In the meantime, however, the proposed legislation would allow the Italian watchdog to examine any future or existing cross-sector investment, the document showed.

Spokesmen for Mediaset and Vivendi said they had no immediate comment on the matter.

(Reporting by Giuseppe Fonte and Elvira Pollina; Editing by David Goodman)

By Giuseppe Fonte and Elvira Pollina