MILAN, Nov 2 (Reuters) - Monte dei Paschi (MPS) resumes discussions on Monday on its capital needs while the Treasury rebuffs political pressure to pour more cash into the bailed-out Italian lender unless there is a merger deal, three sources close to the matter said. Italy had to rescue the bank in 2017 and in August earmarked 1.5 billion euros ($1.8 billion) to help to smooth the path to its re-privatisation. But Italy’s ruling coalition is divided over strategies to fill capital gaps the bank faces as a result of provisions against legal risks and a bad loan clean-up. One of the sources said the bank was considering transferring credit risks on up to 2 billion euros ($2.3 billion) of performing loans to a third party so as to free up capital and buy time. MPS declined to comment. The bank is at risk of breaching regulatory capital requirements after setting aside more than 400 million euros against legal claims following the conviction of three former executives. MPS must also complete by Dec. 1 a bad loan spin-off which requires 1.1 billion euros in equity. A majority in the 5-Star Movement in Italy’s ruling coalition is pushing for a share issue to keep the bank under state control in the near term and to fund a stand-alone business plan that MPS CEO Guido Bastianini is working on, party sources have said. The Treasury, led by prominent Democratic Party (PD) member Roberto Gualtieri, wants to use state funds to support a merger of MPS with another bank, a solution advocated by former MPS CEO Marco Morelli. On Saturday, Gualtieri said the restructuring Italy agreed with Brussels as a condition for MPS’s rescue had to include a merger with a strong partner. The government had been focusing on UniCredit as a potential merger candidate after an earlier looking at a possible deal with Banco BPM, sources have said. But a person involved in efforts to re-privatise MPS said any deal was blocked by MPS’ pending legal disputes if the state did not provide guarantees. On Saturday, the Treasury denied a report in the Italian media saying the ministry had offered to inject up to 2.5 billion euros in cash into MPS if UniCredit took it over and another 3 billion euros in deferred tax assets. UniCredit has ruled out any M&A for the moment but sources have said it may consider MPS under the right conditions, which include a neutral impact on its balance sheet. “The deal presents more risks than opportunities for UniCredit as legal risks would increase, CET1 (capital) neutrality wouldn’t be met and even assuming significant cost synergies, the deal dilutes 2022-2023 earnings per share by around 20%,” broker Equita said. ($1 = 0.8587 euros) (Reporting by Giuseppe Fonte, Valentina Za and Stefano Bernabei. Editing by Jane Merriman)