ROME, Oct 26 (Reuters) - Italy plans to negotiate with the European Commission a "long extension" of the deadline to cut Rome"s 64% stake in ailing bank Monte dei Paschi di Siena (MPS) (BMPS.MI), a source close to the matter told Reuters. The extension to be requested by the Treasury to Brussels will amount to "years," the source said, without elaborating. The development comes after talks with Italy"s No.2 bank UniCredit (CRDI.MI) over a potential merger deal with the Tuscan lender collapsed on Sunday. read more Rome believes the European Commission has no interest in putting Italy in a difficult negotiating position, the source added, who declined to be identified due to the sensitivity of the matter. Under the terms of a state bailout agreed with Brussels in 2017 at a cost of 5.4 billion euros ($6.28 billion), the Treasury was due to cut its 64% stake in MPS no later than the approval of its 2021 results, meaning mid-2022 at the latest. After deeming UniCredit"s 6.3 billion euro capital demand too high a price to pay to offload MPS, Italy"s Treasury now needs to address the bank"s capital requirements which MPS has put at 2.5 billion euros. A cash injection is now likely to exceed that figure, two sources close to the matter told Reuters on Monday. One of the sources said it could total 3.5 billion - or 3.5 times the bank"s current market value. Italy has so far set aside 1.5 billion euros to recapitalise Monte Paschi. Developments on this could come in Rome"s 2022 budget expected to be unveiled by Prime Minister Mario Draghi"s government this week. The capital increase would take place as a market transaction to avoid any "burden sharing" with junior bondholders. These investors must bear losses under EU rules if cash calls are classed as state aid. Private investors contributed 2.8 billion euros to MPS" 2017 rescue through a debt-to-equity swap. Italy also plans to implement some of the measures it had offered to UniCredit as part of a new stand-alone plan for MPS. The bank"s residual problem debts, worth around 4 billion euros, will go to state-owned bad loan manager AMCO, while state agency Fintenca is expected to take on up to 5 billion euros in legal claims stemming from MPS" pending lawsuits. ($1 = 0.8593 euros)