After a proposed sale of Monte dei Paschi to UniCredit fell through, the Treasury had introduced a 500 million euro ($535 million) cap which one of the sources said would remain in place in the extension.

In their current form, the tax breaks allow companies to pay a fee to turn into tax credits so-called deferred tax assets (DTAs) stemming from past losses in the case of merger deals approved by directors or shareholders by June 30, 2022.

Italy's fifth-largest bank BPER Banca agreed earlier this year to buy troubled rival Carige, in a deal expected to have a neutral impact on its capital reserves thanks in part to the tax incentives.

Carlo Cimbri, the CEO of Italian insurer Unipol, which is the leading shareholder in BPER Banca, said on Tuesday he expected the Carige deal to close by the end of this year.

France's Credit Agricole also benefited from the tax scheme when it took over regional bank Creval in 2021.

($1 = 0.9342 euros)

(This story has been refiled to fix typo in fourth paragraph)

(Reporting by Giuseppe Fonte and Valentina Za; Editing by Angus MacSwan)