* MPS to issue 1.6 billion euros in new shares

* Seeks new CEO after boardroom tensions

* MPS to spin off Mediobanca brand into unlisted unit

By Valentina Za

MILAN, March 11 (Reuters) - Italian banks Monte dei

Paschi di Siena (MPS) and Mediobanca have

approved steps toward a full merger, after tensions among

shareholders and directors over the plan led the MPS board to

vote against retaining its CEO.

MPS said late on Tuesday it would issue up to 1.6 billion

euros ($1.9 billion) in new shares and offer Mediobanca

investors 2.45 MPS shares for each Mediobanca share tendered.

The aim is to buy the 14% of the partner it doesn't already own

and take it private.

The exchange ratio implies a roughly 3% premium to Tuesday's

closing prices when adjusted for dividend payments, Reuters

calculations showed. Shares in both banks rose in early trade,

bucking a weakening in the sector.

NEW CEO SOUGHT

The full merger is in line with the strategy for the combined

group MPS Chief Executive Luigi Lovaglio presented to investors

on February 27, before the bank's board voted to deny him a new

mandate.

MPS has put forward three alternative CEO candidates for

shareholders to vote on in April, with no rival list presented

so far.

Lovaglio, who led the bank's restructuring, its return to

private ownership and the takeover of its larger rival, had won

backing from top shareholder Delfin and Italy's Treasury but not

from No. 2 investor, Francesco Gaetano Caltagirone.

Caltagirone did not view the full Mediobanca acquisition as

a priority despite pressure from the European Central Bank to

complete the plan, sources have previously said.

MPS will spin Mediobanca off into an unlisted unit, which

will retain the Mediobanca brand, the wealth management, and

investment banking businesses of the Milan lender it bought in a

16 billion euro cash-and-share deal.

The acquisition, eight years after MPS was rescued by the

state, was the largest transaction in a consolidation wave

reshaping Italy's banking sector.

MPS said Jefferies, JPMorgan ( JPM ), UBS, and Alvarez and Marsal

acted as financial advisers, while Mediobanca worked with Morgan

Stanley ( MS ) and Rothschild.

($1 = 0.8595 euros)