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(Adds comments on Saipem, privatisation)
By Francesca Landini
MILAN, March 31 (Reuters) - Italian state fund Cassa Depositi e Prestiti (CDP) said on Friday 2016 net profit jumped 86 percent to 1.7 billion euros ($1.8 billion), raising the prospect of a bumper dividend for the cash-strapped treasury.
The lender, in which the Italian treasury has an 83 percent stake, paid 683 million euros in dividends to the state last year after booking a profit of 900 million euros. It said on Friday it had yet to decide how much it will pay out this year.
A 162 percent increase in net interest income - partly due to higher interest rates charged on loans to the state - more than offset writedowns the CDP booked on its real estate portfolio and on its investment in bank rescue fund Atlante, CEO Fabio Gallia said.
CDP's role in Italy's industrial policy has grown rapidly since the appointment of top bankers Gallia and Claudio Costamagna at its helm in 2015.
Under the new managers, CDP was instrumental in setting up Atlante last year, a state-sponsored, mostly privately-financed fund aimed at helping struggling lenders.
CDP contributed 500 million euros to Atlante, whose initial financial warchest stood at 4.25 billion euros. But like several other financial institutions, CDP has had to cut the value of its holding as two regional banks rescued by the fund continued to rack up losses.
The state agency also spent 900 million euros to buy a 12.5 percent stake in oil service group Saipem from Eni .
CDP will book an impairment on that investment too, but the impact will be offset by the revaluation of other holdings, Costamagna, CDP's chairman, told journalists.
"The stake in Saipem is not for sale," Costamagna said.
CDP also owns stakes in several companies considered strategic by the government, including 26 percent of Eni and 35 percent of post office Poste Italiane.
Some Italian newspapers have said the treasury could transfer to CDP additional stakes in Eni, Poste or utility Enel and then sell a minority stake in the state lender to institutional investors to cut public debt.
Costamagna declined to comment on that speculation. (Editing by Mark Potter)