MILAN (Reuters) - Italy is struggling to find a "strategic" buyer for its stake in lender Monte dei Paschi di Siena before a year-end deadline, leaving it with little alternative but to turn to the market and broaden a fragmented shareholder base, two sources close to the sale process said.

Italy must cut its 26.7% stake below 20% by the end of December to show the European Union authorities it no longer controls MPS, in line with re-privatisation commitments agreed during a 2017 bailout.

The original EU deadline was extended after Italy failed to sell MPS to UniCredit in 2021.

The government believes a strategic buyer - such as another Italian bank - would be the best guarantee for MPS' future and sources have previously said banking supervisors favour such an option.

But MPS shares have more than doubled over the past two years, dampening its appeal for rivals.

Without a merger, long-term shareholders, for example banking foundations, are seen as preferable to investment funds, but efforts to secure such buyers have also produced poor results, the two sources said.

As it did in recent months, the Treasury is likely to conduct another market placement in which shares are typically sold to multiple investors offering the highest price, the two sources familiar with the sale process said.

MPS declined to comment. A spokesperson for the Treasury said it maintained a profile of strict confidentiality for the best outcome of the stake sale.

Italy's plans come as several euro zone governments move to cut holdings in banks they rescued after the 2008-2009 global financial crisis, with most sales through market placements known as accelerated book building (ABB).

The Dutch government this month said it would reduce its ABN Amro stake. Germany in September sold a 4.5% Commerzbank stake, which was snapped up by UniCredit.

Italy's Economy Minister Giancarlo Giorgetti has said the Treasury would cut its MPS stake this year.

The country has already pocketed nearly 1.6 billion euros ($1.7 billion) by lowering its original 64% MPS stake and a further 10% sale would net 640 million euros at current market prices. 

Banco BPM, Italy's third-largest bank, has long been seen in Rome as the best fit for MPS, sources have previously said.

The Treasury has repeatedly tried to secure an approach from BPM, whose main investor is France's Credit Agricole, but CEO Giuseppe Castagna has refused to engage, the first two sources said.

Banco BPM has repeatedly denied any interest and declined to comment on Wednesday.

Giorgetti and Prime Minister Giorgia Meloni have both said the privatisation of MPS should help build a third large banking group, alongside Intesa Sanpaolo and UniCredit.

Italy's fourth-largest bank by assets, BPER, is also a candidate for the project.

BPER's leading shareholder, insurer Unipol, has said it could take a stake in MPS if Unipol replaced France's AXA as its insurance partner, but the sources said there were no active talks between the Treasury and Unipol, with both waiting for the other to move first.

($1 = 0.9249 euros)

(This story has been refiled to fix the headline)