ROME: Italy's Treasury is working to sell state-owned Monte dei Paschi to bigger rival UniCredit under conditions that would spare bondholders in the Tuscan bank from sharing any losses, two sources involved in the discussions said.

Italy's No.2 bank said on July 29 it had signed an accord with the Treasury setting guidelines for a potential takeover of MPS, in which Rome has a 64% stake having rescued it in 2017 at a cost to state coffers of 5.4 billion euros ($6.4 billion).

Monte dei Paschi's Tier 2 bonds are facing another turbulent week as investors weigh up the risk that holders may suffer losses as part of any acquisition, Refinitiv's IFR service reported on Friday.

Under "burden sharing" rules designed to shield taxpayers from costly bank bailouts, European Union competition authorities demand investors in a failing bank bear costs before the state can step in.

Economy Minister Daniele Franco said this week any deal with UniCredit would take place as a market operation, not a fire sale.

One of the sources, who asked not to be named given the sensitivity of the issue, said that Franco's comment meant the Treasury would not seek authorisation from Brussels for further state aid to clinch the sale.

However, the strict terms set by UniCredit to enter negotiations over MPS are expected to translate into heavy costs for Italian taxpayers. UniCredit has demanded the deal have no impact on its capital while boosting its earnings per share by at least 10%.