By Giuseppe Fonte

ROME Italy's government plans to raise its 2024 budget deficit target to between 4.1% and 4.3% of gross domestic product (GDP), up from the 3.7% goal set in April, sources familiar with the matter told Reuters on Monday.

The fiscal gap next year is, however, seen below 4% of GDP under current trends.

That allows leeway worth several billion euros which will help Prime Minister Giorgia Meloni to fund measures in the upcoming 2024 budget.

Among her top priorities, Meloni intends to earmark more than 9 billion euros ($9.5 billion) to extend to 2024 the tax cuts that have helped middle and low-income workers cope with high consumer prices this year.

Italy is also preparing to raise this year's budget deficit above the current target of 4.5% of GDP due to the growing impact of costly fiscal incentives for home improvements.

Separate sources last week said the updated 2023 goal would be in the region of 5.5% as a proportion of GDP.

For 2024, the upcoming budget has been made challenging by a slew of weak data that cast a shadow over Italy's near-term growth prospects, hurting tax revenues.

The country's GDP shrank by 0.4% in the second quarter from the first and industrial output was weaker than expected in July, getting the third quarter off to a faltering start.

Moreover, the negative impact on Italy's economy from European Central Bank (ECB) interest rate hikes to curb inflation will intensify in the coming months, economists warn.

The Treasury currently estimates Italy can still grow by 0.9% or 1% this year, broadly in line with the current target, while the 1.5% forecast in 2024 is likely to be revised down to 1.1 or 1.2%.

All figures are still subject to some changes as talks within the government continue.

Meloni's cabinet is expected to meet on Wednesday to unveil a raft of economic targets in the Treasury's annual Economic and Financial Document.

($1 = 0.9439 euros)

(Editing by Chris Reese and Mark Potter)