Profumo and Monte dei Paschi Chief Executive Fabrizio Viola met Economy Ministry officials on Monday to consider the bank's next move after European Central Bank stress tests exposed a 2.1 billion euro (1.67 billion pound) capital shortfall.

In a telephone interview with Reuters, Profumo confirmed the meetings had discussed reviewing the deadline for repaying 750 million euros of state aid and said potentially pushing back the schedule should be taken seriously.

"I think it is right to consider this option too," he said, noting that the Bank of Italy had said explicitly that the shortfall after the stress tests would fall to 1.35 billion euros if repayment of the state aid were not counted.

The aid, provided in 2013 in the form of so-called "Monti Bonds", named after former Prime Minister Mario Monti, is due to be repaid in three tranches between 2015-2017.

A senior official said the Treasury was open to the idea, which could gain Monte dei Paschi much-needed breathing space as it seeks to clean up its balance sheet and fight clear of a crisis dating back to its costly acquisition of rival lender Banca Antonveneta in 2007.

"We will not oppose a request from the bank to delay state aid repayment, there is a contract that already sets the conditions for that to happen," Alessandro Rivera, director general for the financial sector at the Treasury told Reuters.

He said that a delay in payments would be preferable to a solution in which the Treasury exchanged part of the loans for shares in the bank.

Monte dei Paschi (>> Banca Monte dei Paschi di Siena SpA), Italy's third-largest bank, was left badly exposed by the ECB's health check of 130 European banks, which set strict capital thresholds to ensure the solidity of the financial system.

The latest crisis has once again created doubts over the future of the world's oldest bank, founded in 1472, which has struggled to recover from the Antonveneta debacle as well as a series of disastrous derivatives deals.

"A WIDER SETTING"

The bank has two weeks to submit a capital-boosting plan to the ECB and nine months to implement it but there has been wide speculation that the cleanup would be a preliminary step to a merger with another bank.

Asked if a merger was among the options being considered, Profumo said: "Obviously there is also this one."

He added that there had been no contacts with potential buyers or investors and said no decision had been taken yet. He said within three years the bank could find itself "within the framework of a wider setting," but declined to be more specific.

With another Italian bank, Genoa-based savings bank Carige (>> Banca Carige SpA) forced to raise 814 million euros, the stress tests laid bare the damage wrought on Italy's banking sector by the worst recession seen since before World war Two.

The slump has seen output from the eurozone's third-largest economy collapse by 9 percent since the start of the financial crisis in 2008, driving thousands of companies out of business and building up billions of euros in bad loans at the banks.

Monte dei Paschi's shares recovered slightly on Tuesday and closed up 1.4 percent after diving by as much as 25 percent on Monday in the wake of the stress test announcement.

Over the past three years, it has racked up about 9.3 billion euros in losses and was forced to accept a restructuring plan imposed by the European Commission as a condition for being allowed to receive 4.1 billion euros in state aid.

It has already repaid 3 billion euros of that aid, with further payments of 600 million falling due in 2015 and 150 million in 2016, the end of the period covered by the ECB stress tests. A final payment of 321 million falls due in 2017.

The bank, which has hired Citigroup and UBS to advise it on its options, has already conducted a fire sale of assets, closing 550 branches and laying off about 8,000 staff. But it is having to look at further disposals to raise cash.

As well as further asset sales, including of its consumer credit arm and perhaps of its asset manager Anima, bankers say a new bond issue could be possible.

(Additional reporting by Luca Trogni, Francesca Landini, Elvira Pollina, Silvia Ognibene and Alberto Sisto, writing by Silvia Aloisi and James Mackenzie; Editing by Peter Graff)

By Giselda Vagnoni and Silvia Aloisi

Stocks treated in this article : Banca Carige SpA, Banca Monte dei Paschi di Siena SpA