* MPS must plug 2 billion euro capital hole * Treasury keen to ease MPS merger with healthier bank * MPS CEO working on stand-alone plan backed by 5-Star * Rome had been negotiating MPS-UniCredit tie-up By Giuseppe Fonte, Valentina Za and Stefano Bernabei ROME/MILAN, Dec 8 (Reuters) - Deep differences within Italy’s ruling coalition over the future of Monte dei Paschi (MPS) could come to a head this week as parliament starts voting on next year’s budget. The Treasury, led by prominent Democratic Party (PD) member Roberto Gualtieri, has included tax breaks to ease a merger with a stronger rival and to cut the 64% stake in the loss-making bank it acquired in 2017 for 5.4 billion euros ($6.6 billion). Any company merging in 2021 can benefit from the scheme, which analysts see as a game-changer for bank consolidation as it allows to a stronger bank to cover the hit to its core capital from integration and clean-up costs with a weaker one. Italy’s co-ruling 5-Star Movement, on the other hand, opposes re-privatising MPS and has filed several proposals to limit the benefits of the scheme, including setting a 500 million euro cap, which is well below the 2.4 billion euro boost any MPS buyer stands to gain in its current form. The PD and 5-Star parties, who have already clashed over a planned reform of the euro zone’s bailout fund, may push back any decision on the divisive tax breaks. Any changes to the tax scheme would seriously undermine negotiations with UniCredit, which were complicated by CEO Jean Pierre Mustier’s decision to quit, sources say. UniCredit would only consider an acquisition that did not affect its capital reserves, sources have said. A possible UniCredit deal would still leave the Treasury with an MPS stake, which broker Equita calculated would be 11%, but a senior government official told Reuters that Rome would look to divest this as soon as conditions were right. Five-Star lawmakers want to avoid offloading MPS at a loss after criticising previous governments for shoring up banks. “The Movement wants the Treasury to renegotiate with the EU the deadline to exit MPS, currently set to when the bank approves 2021 results,” 5-Star lawmaker Giovanni Curro said. “If the state is going to spend any money, it should be used to recapitalise the bank under a stand-alone scenario. Tie-ups can be considered after restoring it to health.” The Treasury wants instead to use 1.5 billion euros it has already set aside for MPS to secure a long-term solution. MPS must tell the European Central Bank by the end of January how it plans to fill a capital gap created by a recent bad loan clean-up and provisions against legal disputes it faces after year of mismanagement. Guido Bastianini, who became CEO in May with 5-Star’s backing, is working on a new business plan and will tell the board on Dec. 17 how much cash it needs under various scenarios. Bastianini would flag a 2 billion euro capital shortfall and 3,000 job cuts under the stand-alone plan, people familiar with the matter said. Layoffs, partly offset by one new hiring for every four people leaving, could rise to up to 6,000 depending on how much money MPS could spend on early retirements. ($1 = 0.8240 euros) (Reporting by Valentina Za, Giuseppe Fonte and Stefano Bernabei; Editing by Alexander Smith)