* TIM board to discuss CEO's departure on Monday
* Broadband dispute escalated clashes with Vivendi - sources
* TIM says Cattaneo leaving because reached targets early (Recasts with suspension of rural broadband plan)
MILAN, July 24 (Reuters) - Telecom Italia has put a plan to roll out ultrafast broadband in rural areas of Italy on hold, two sources familiar with the matter said, suspending a project that triggered a row with the government and contributed to the imminent departure of its CEO.
After initially saying it would not roll out broadband in areas where it could not guarantee a return on its investment, Telecom Italia (TIM) infuriated Rome in March by saying it would put money into some of these areas after all.
The government had in the meantime planned state-subsidised tenders for the project and said TIM's change of heart could undermine those tenders.
TIM's u-turn led to a probe by Italy's market watchdog into potential anti-competitive conduct and also prompted clashes between Chief Executive Flavio Cattaneo and the company's top shareholder Vivendi.
Sources have said the dispute has contributed to Cattaneo's premature exit; TIM's board is set to discuss his departure after just 16 months in the job later on Monday.
"Today's step is clearly an exercise in damage-control by Vivendi," Bernstein analysts said in a note.
The French media company is keen to maintain good relations with Rome, particularly as it is already under scrutiny for its growing influence in Italian business through its stake in TIM and a 30 percent share in private broadcaster Mediaset.
One of the sources said the connections so far installed by TIM in rural areas had not been activated and no other work was planned for now. Another person added TIM was struggling to find partners to fund the rollout.
TIM said on Sunday Cattaneo was leaving because the company had "reached important results ahead of plan, which allows it to start a new phase." It dismissed suggestions his departure was linked to clashes with Rome.
Cattaneo, meanwhile, has defended what is likely to be a multi-million euro severance package, saying he delivered on many of his goals ahead of time, La Repubblica newspaper reported on Monday.
"The severance package I will get is not a scandal," he was quoted as saying by a person close to him.
Under a "special award" clause in his contract, Cattaneo could claim up to 40 million euros ($47 million) if his term is terminated early or his powers reduced.
One source close to the situation said he would get 32 million euros, the biggest severance pay ever awarded to an executive in Italy after just over one year in office.
Sources familiar with the matter said on Friday Vivendi executive Amos Genish, a former head at Telefonica's Brazil unit, was set to be appointed as TIM's managing director, effectively taking over from Cattaneo.
La Repubblica said Cattaneo fell out with Vivendi, which has a 24-percent stake in TIM and has been tightening its grip on the company, because of its plan to appoint Genish at his side.
Shares in TIM rose more than 3 percent on Monday, as analysts bet management change could help improve TIM's relationship with Rome and that the cost cutting drive set in motion by Cattaneo would continue. TIM is expected to report another strong set of results later this week.
"The strategic uncertainty could be balanced by a more positive relationship with the government and on speculation for potential corporate action," Banca Akros said in a note, citing the possibility of TIM spinning off its fixed line network.
($1 = 0.8584 euros) (Additional reporting by Valentina Za, writing by Agnieszka Flak; Editing by Mark Potter)