MILAN (Reuters) - Italian government should improve its new incentive plan for booming solar sector including tariff cuts and cap on subsidized capacity to ensure investment flow and steady industry growth, an sector body head said on Friday.

The government, which works on a new incentive plan as the current one is due to expire this year, has said it would cut incentives to ease the budget burden. It is expected to present the new scheme in mid-February.

Cuts in a key feed-in tariff proposed by the government for 2011 and the following 2 years are sharper than the industry has counted on and a cap on new capacity to be covered by incentives is too tight, Assosolare Chairman Gianni Chianetta said.

One of the main sticking points is an up to 18 percent cut in the feed-in tariff for large-scale photovoltaic installations -- which turn sunlight into power -- in 2011 included in the latest draft of a government decree circulating in the industry.

Assosolare, which represents about 70 companies active in the photovoltaic sector in Italy with a total turnover of about 1.6 billion euros in 2008, and other renewable energy bodies would accept a 14 percent cut but not more, Chianetta said.

"We agree that there should be a reduction (in incentives) but ... 14 percent is a maximum cut which can be accepted," he told Reuters in a telephone interview.

A 6 percent average annual cut seen by the government from 2012 in an expected three-year plan is also sharper than a 4 percent cut proposed by the industry and would bring returns on investment bellow a 10 percent floor, Chianetta said.

"Returns on investment should not be lower than 10 percent. Otherwise it would be more interesting to make an investment in real estate," he said.

Returns on investment come at about 8-12 percent in Italy with greater yields seen in the sun-lit southern regions, according to several industry sources.

Investors, from families to sports car maker Ferrari and banks, have piled into Italian photovoltaic (PV) sector since 2007 when the current incentives, seen among the most generous in Europe, were launched.

The scheme expires when the total PV capacity covered by incentives reaches 1,200 megawatts.

The government plans to put a 3,000 MW cap on the new subsidized capacity in 2011-2013 is too stringent for the rapidly growing industry which counted on a 4,000 MW limit, Chianetta said.

Italy's total installed PV capacity is expected to exceed 900 MW in 2009 and hit the 1,200 MW cap in July, according to the state energy management body GSE.

Chianetta said the government would improve the incentive package in the final talk with the industry representatives expected in the next few days.