* New provisions may top 500 million euros - source

* Legal risks major hurdle for privatisation plans

* Potential buyers want Treasury to offset purchase costs, risks

ROME, Oct 21 (Reuters) - Italian bank Monte dei Paschi (MPS) has called an extraordinary board meeting on Oct. 29 to discuss increasing provisions against legal risks after a court convicted two former top executives, two sources close to the matter said.

Disregarding the prosecution's request to dismiss the case, a Milan court last week handed a jail sentence to former MPS CEO Fabrizio Viola and former chairman Alessandro Profumo for alleged false accounting in the booking of two derivatives trades.

Profumo and Viola had denied any wrongdoing and a lawyer representing the defendants said they planned to appeal.

MPS is considering putting aside more money to cover potential damage claims from investors, sources have told Reuters. The new provisions could top 500 million euros in the third quarter, after 357 million were set aside in the second, one of sources said.

Damage claims from MPS shareholders, which have risen to around 10 billion euros, are the main obstacle to Rome's plans to reduce a 68% stake in the bank held since a state-backed rescue in 2017, investment bankers said.

The state has until mid-2022 to re-privatise the bank under the terms of the bailout but it had been looking to strike a deal by Christmas.

A senior government official told Reuters the Treasury had not yet given up hope a deal could be agreed this year even though initial attempts at finding a buyer have foundered.

A merger would avoid MPS having to issue costly Tier 1 debt to comply with European Central Bank conditions for a bad loan clean-up plan that Rome has engineered to attract potential buyers.

The cost of the new Tier 1 debt would be above the current 10% yield of a Tier 2 bond MPS issued in September to meet another of the ECB's conditions.

Potential buyers for the government's MPS stake, such as UniCredit or Banco BPM, want the state to offsets risks connected with the acquisition, something the Treasury is prepared to do only in part, the senior government official said.

($1 = 0.8436 euros) (Reporting by Giuseppe Fonte and Valentina Za, editing by Giulia Segreti. Editing by Jane Merriman)