* Rome conference seeks final deal to save Libya
* Hardliners resist proposed UN unity government
* Sanctions, foreign aid possible after new deal
* West wants to stop Islamic State spread in Libya
By Patrick Markey
ALGIERS, Dec 13 (Reuters) - After a year of U.N. talks to end Libya's conflict, Western powers are coaxing the warring factions closer to a deal they hope can help stop the spread of Islamic State militancy in the North African country.
U.S. Secretary of State John Kerry will co-chair a meeting of European, Middle Eastern and North African powers in Rome on Sunday to push the two camps to sign the U.N. proposal.
Delegations from Libya's two rival governments have agreed to Dec. 16 as a date to sign, but opponents are resisting. Past deadlines have slipped while wide areas of the large oil-producing country splintered into fiefs of rival armed factions.
Four years after a rebellion toppled Muammar Gaddafi, Islamic State has established a presence there, away from their strongholds in Syria and Iraq. This prompted France and Italy this week to urge action on Libya.
"Mobilising international support to assist Libyan authorities to take decisive measures to combat, contain and eliminate this imminent danger is a must," U.N. envoy Martin Kobler told the Security Council on Friday.
The recognised government and elected House of Representatives have operated only in the east of Libya since last year, when the capital Tripoli was seized by a faction that set up its own government. Each side is backed by competing alliances of former anti-Gaddafi rebels.
Western officials and diplomats say the Rome meeting will be an effort to present a united international front, push for a final deal and show Libyans they are supported.
Kobler is working to get both parliaments to ratify a deal. But, diplomats and Western officials say, if that doesn't happen, a "Plan B" will be signatures from lawmakers in each camp and independents who already agree, as a way to bypass opponents who would be urged to join later.
"At the end, we will have a date for signature. He is aiming for something before Christmas," a Western diplomat said. "But there is uncertainty about how wide support is on the ground, and about the security situation in Tripoli."
The U.N. proposal calls for a presidential council with the House of Representatives as the legislature alongside a second consultative chamber, the State Council.
The presidential council could form a government in 30 days once a deal is signed and that would be ratified by parliament and backed by the U.N. Security Council resolution. Sanctions against those who opposed may come after, diplomats said.
"Either we get a vote before the end of the month, or we can move to Plan B," one North African diplomat said.
But with Libya already fragmented, questions remain about how opponents and armed factions who reject the deal will react to what they will see as an unrepresentative Tripoli government and how they can be brought onboard after.
"Ending negotiations will strengthen hardliners; Granting recognition to a government that has insufficient backing will condemn it to irrelevance," International Crisis Group said in a statement before the Rome meeting.
AIR STRIKES, UNITED ARMY
Any government faces huge challenges with the oil industry battered by attacks and protests. Output is less than half of 1.6 million barrels per day the OPEC state had before 2011.
Security for Tripoli and assembling a military force for a new government will be key. Libya has no real national army, but two coalitions of forces whose ranks have fragmented.
Exploiting the anarchy, Islamic State set up base in Sirte. With around 3,000 fighters, it has attacked a hotel and a prison in Tripoli, oil fields and military checkpoints.
Western officials say Libyans will have to decide what foreign help they want, but more unilateral air strikes on militants are not ruled out. The United States has carried out strikes and France also conducted surveillance flights.
But with most opposing "boots on the ground", initial efforts will likely focus on training and aiding local forces.
"There won't a Libyan army as we'd like it, but there are a number of forces, which if they worked together would have enough strength to hit Daesh," said one Western official using the Arabic term for Islamic State.
Uniting factions will prove tricky. Two years ago, when international community tried to rebuild an army, many programs fell apart as rival brigades descended into infighting.
Powerful Misrata brigades helped take Tripoli last year, but they now back the U.N. deal. In the capital, their forces sit uneasily alongside Tripoli brigades who oppose the accord.
Misrata is closest to Islamic State on front lines. But Ibrahim Jathran, whose forces control nearby oil ports and is allied with the east, may also need to join in the battle.
"LNA by itself can't defeat Daesh, it will need some of the Misrata militias and Jathran," another diplomat said. "We don't know who the right partner is. Until we look at their capabilities, we can't say." (Additional reporting by John Irish in Paris and Jonathan Landay in Washington; Editing by Mark Heinrich)
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