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UPDATE 2-Mediaset and Vivendi near deal to end legal stand-off -sources

Elvira Pollina and Gwénaëlle Barzic

(Adds Mediaset chairman, talks continuing late into night)

MILAN/PARIS, Nov 28 (Reuters) - Mediaset and Vivendi are close to ending a long-running legal stand-off with a deal that would see the French group sell a 20% stake in the Italian broadcaster, four sources said on Thursday, less than 24 hours ahead of a court-imposed deadline.

The two media groups have been locked in a series of legal disputes for more than three years and recently fell out over Mediaset's plans to create a pan-European TV champion.

A deal would free Mediaset to press ahead with merging its Italian and Spanish units into a Dutch holding company.

Vivendi, Mediaset's second-biggest shareholder and worth 10 times more than the Italian broadcaster, would sell two thirds of its 29% stake to the holding company, called MediaForEurope (MFE), two of the sources said.

"We are almost there," added one, speaking on condition of anonymity because the talks are confidential and ongoing.

Lawyers for the two sides were engaged in negotiations late on Thursday, with one source saying talks could stretch well into the night.

"The agreement is not quite there yet, the sides will be negotiating flat out. There is cautious optimism, but I underline cautious," one of the sources said.

Vivendi's stake would be valued at a nominal 2.77 euros ($3.05) per share but would be bumped up to about 3 euros after interest payments and a special dividend Mediaset has already said it would pay to MFE shareholders, the sources said.

Mediaset has called a board meeting for Friday to discuss a possible deal with Vivendi, another source said.

A Milan judge last week gave the companies until Nov. 29 to settle their disagreements over MFE after attempts to reach an accord failed.

Mediaset Chairman Fedele Confalonieri, asked late on Thursday whether a deal was in sight, told Reuters: "Let's hope so. Let's see."

STAND-OFF

Milan-based Mediaset, controlled by the family of former Italian prime minister Silvio Berlusconi, wants to use MFE to build alliances with other broadcasters in Europe, including Germany's ProSiebenSat.1.

It views this as crucial to its ability to compete with streaming services such as Netflix and the likes of web giant Google.

Vivendi opposes the 4 billion euro ($4.4 billion) deal, saying Mediaset's governance plans for MFE would be detrimental to minority shareholders.

One of the sticking points was disagreement over a five-year standstill clause Mediaset wants to impose to prevent Vivendi from buying back MFE shares, one source said.

Vivendi, led by billionaire Vincent Bollore, is expected to hang on to the remaining stake of almost 10%, at least for now, in case opportunities came along, bankers said.

However, another source close to the matter said the French group, which has also been looking to create a southern European media powerhouse, could eventually sell all of its stake.

Mediaset shares closed 0.9% higher at 2.7890 euros. ($1 = 0.9073 euros) (Reporting by Elvira Pollina, Gianluca Semeraro in Milan and Gwenaelle Barzic in Paris; additional reporting by Alfredo Faieta, editing by Silvia Aloisi, Alexander Smith and David Goodman)