By Ariane Luthi and Oliver Hirt

ZURICH, Dec 5 (Reuters) - The Swiss government is set to soften part of a banking regulation package that could force UBS to add as much as $24 billion in capital, three people familiar with the matter said.

The government is preparing to water down some of the rules it has direct control over, two of the sources said, speaking on the condition of anonymity because of the sensitivity of the matter. 

Those regulations relate to the valuation of deferred tax assets and software, among others, which would amount to about $11 billion of the total extra capital UBS could need to hold. It is not clear how significantly the government will soften them.

Weakening the proposed rules would be a boost for UBS, which has said repeatedly that the wealth manager and Switzerland will be harmed. Industry groups, cantonal governments and influential lawmakers have joined the firm in recent weeks in warning that banking could be rendered uncompetitive.

Switzerland's finance ministry said: "The decision-making process on this matter is not yet complete, and the Federal Council has not yet reached a decision. We are therefore unable to comment on the content (of the rules)." 

UBS declined to comment.

The regulatory package is split into measures the government can issue directly and those that parliament decides.

The government is set to stick to its proposal it will make to parliament that UBS must fully capitalise foreign subsidiaries at home, a measure that would account for the biggest chunk of the $24 billion, two of the sources added.

Shares in UBS jumped after the Reuters report, closing up 4.1% and outpacing the wider financials market.

SOFTER ORDINANCE COULD SAVE $7 BILLION

The government plans to publish the ordinance rules it has control over alongside the final legal proposal for the regulations parliament votes on, the sources said, likely early in the second quarter next year.

The ordinance defines how to value assets like software and deferred tax assets, and will come into force in January 2027 before the remaining regulations begin in 2028 or later.

Current proposals state those assets should no longer count as capital, which would require UBS to come up with about $11 billion in extra capital, according to government and UBS calculations.

Banking analyst Stefan Stalmann at Autonomous Research calculates that if the government eliminated the deduction of the relevant deferred tax assets, but allowed for 50% of the deduction of software to be kept, it would reduce the amount of extra capital UBS needed by $7 billion.

Two influential parliamentary committees have requested the government not to exceed international standards with any of the new Swiss rules.

LAWMAKERS PRESSURE GOVERNMENT

UBS executives have warned privately of contingency planning for a possible move of its headquarters abroad if the rules were not diluted.

Last month it was helped by letters from two sets of lawmakers telling the government to change tack, a strong signal from parliament, lawmakers and lobbyists told Reuters.

"I am sure that a compromise will be reached and expect that a moderate middle ground will be agreed upon," said Thomas Aeschi, a lawmaker who leads the parliamentary group of the right-wing Swiss People's Party.

Representatives of centre and leftist parties also told Reuters they expected amendments, even if some did not favour softer rules themselves.

(Reporting by Ariane Luthi and Oliver Hirt; Editing by Tommy Reggiori Wilkes and Elisa Martinuzzi)