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UPDATE 3-BlackRock pulls out of rescue for Italian bank Carige

Stephen Jewkes

* BlackRock's move flags worries about political risk

* Withdrawal could force state into fourth big bank bailout

* ECB has set mid-May deadline for bids for Carige (Adds source's remarks on reasons for BlackRock decision)

MILAN, May 9 (Reuters) - U.S. fund manager BlackRock has pulled out of a proposed rescue of Italian bank Carige , a move that could push Rome's fragile government into another costly state bailout.

BlackRock's decision, which highlights investor concerns about Italy's uncertain political environment, was confirmed by the fund manager and Carige following a report on the move in La Repubblica newspaper. They did not give a reason.

A source familiar with the matter said political infighting and speculation that the government could collapse were among factors that persuaded the fund to back out.

BlackRock also wanted to keep its Carige stake below 25 percent but that had become impossible, the source added.

Under the plan, based on a 720 million euro ($806 million) capital injection, Italian banks were set to take up some of Carige's shares by converting a bond into equity. But without more investors, BlackRock's stake would have exceeded the 25 percent limit.

The rescue aimed to help the state avoid its fourth major bank bailout in two years. The government has earmarked up to 1 billion euros to buy Carige shares if it cannot find investors.

Carige, which has been put under special administration by the European Central Bank, said it was looking at other market solutions to its capital shortfall after BlackRock's move but said it could also seek government financial aid.

"We will evaluate other market solutions aimed at ensuring the stability and turnaround of Banca Carige," the lender said in a statement, adding it could still make a "request for a precautionary recapitalisation to the economy ministry."

The ECB has set a mid-May deadline for investors to submit binding bids for Carige, sources have said.

The ECB said on Thursday it had been informed of developments at Carige and was in contact with its temporary administrators.

Carige has been laid low by years of mismanagement and an excessive exposure to the depressed economy of the northwestern Liguria region.

Italian bond yields have risen in recent days on concerns over tension within Rome's ruling coalition, with the gap between its benchmark bond yields and safer German Bunds increasing on Wednesday to the widest in more than two months.

In another sign of jitters about political risk and a weak economy, Italy's biggest bank by assets UniCredit said this week it would reduce government bond holdings.

But Unicredit Chief Executive Jean Pierre Mustier said on Thursday the bank remained strongly committed to the euro zone's third largest economy.

($1 = 0.8933 euros) (Additional reporting by Andrea Mandala Editing by Silvia Aloisi, Mark Bendeich and Edmund Blair)