MILAN - Telecom Italia shares rose on Monday after Italy's biggest phone group said it would pursue a domestic broadband deal, while also engaging in talks with KKR over the U.S. fund's 10.8 billion euro ($12 billion) takeover approach.

After a near six-hour board meeting on Sunday, TIM said it had asked its CEO and chairman to engage in talks with KKR to find out more about its potential bid. KKR declined to comment.

The board also renewed its support for a plan which new CEO Pietro Labriola presented in early March and said TIM would continue to explore a tie-up with state-backed broadband rival Open Fiber.

The long-mooted Open Fiber merger could provide a 1 euro boost to TIM's shares according to internal calculations, sources familiar with the matter have said.

Labriola, who got the top job in January with backing from leading TIM investor Vivendi, has said his plan is similar to KKR's project. By executing it in-house, TIM would benefit from the gains the private equity firm targets in its turnaround efforts, he said.

Labriola's plan entails separating TIM's services arm from its infrastructure assets, a move that would ease a combination of TIM's network with that of Open Fiber, creating a single wholesale-only broadband provider.

To this end, TIM said it would continue discussions with CDP, Italy's state investor which controls Open Fiber but is also TIM's second-biggest shareholder.

Tim's shares rose as much as 10% to 0.30 euros on Monday, after hitting an all-time low of 0.22 euros last week as investors unwound bets on KKR's 0.505 euros per share offer ever materialising.

"The KKR potential offer remains the lower probability outcome here," Exane BNP Paribas analysts said.

"The company are making sure they follow the correct procedures to ensure that they cannot be accused in the future of neglecting shareholders in the future."

TIM had hoped to secure a preliminary agreement with CDP over Open Fiber in time for Sunday's board meeting but discussions over a tie-up that raises competition issues at the European level will require longer, sources have said.

"Management have shifted message ... and are now pushing the Open Fiber merger angle once again," Exane BNP Paribas said.

"In the short term the hope of 'something' happening is probably enough to continue to draw a line under the shares."

($1 = 0.9132 euros)

(Additional reporting by Giulia Segreti, Writing by Valentina Za. Editing by Jane Merriman)