Italy's dairy sector will survive the ending of European Union milk production limits in 2015, agriculture minister Mario Catania told Reuters.

"Prices will be lower and force us to be more competitive," Catania said in an interview on Saturday. "But the system will hold up."

While the agro-food industry contributes more than 15 percent to the euro zone's third-biggest economy, an opaque distribution chain and a fragmented farmer community have dragged on growth in the sector.

The planned lifting of EU milk quotas in 2015 has stoked fears the domestic market will be inundated by cheaper milk from bigger producers such as France and Germany.

"I am confident. The lifting of the quotas will bring a rationalization of our system and an economy of scale. So, the final impact will not be devastating," Catania said at a conference held by industry body Coldiretti.

Italy produced around 10.6 million tonnes of milk last year, compared with 24 million in France and 28.8 million in Germany.

Italian milk supplies 57 percent of national demand, leaving room for imports which are mainly used for non-certified products such as yoghurt and long-life milk.

The technocrat government headed by former EU commissioner Mario Monti has recently approved a so-called "milk package" allowing farmers and producers to negotiate contract terms collectively.

The move follows a market-focused approach the European Commission - the EU's executive arm - has taken over recent years to allow a soft landing in the dairy sector ahead of the end of milk quotas introduced in 1984 to stabilize the sector.

Monti said at the conference on Saturday he would keep the agricultural sector as a government priority when it discusses the new EU farm policy.

The EC presented proposals at the end of last year to reform the bloc's 55 billion euros ($72 billion) per year common agricultural policy (CAP) for 2014-20, which must be jointly approved by EU governments and lawmakers.

The plans are aimed at making the CAP fairer and more environmentally friendly, and help farmers face challenges such as market volatility and climate change.

CLOSURES

Coldiretti sounded an alarm on Saturday about the state of the agricultural sector in Italy, saying around 60,000 dairy farms have closed in Italy over the past 20 years and production costs have risen 40 percent between 2011 and 2012.

A further reason for concern comes from the government's imminent clampdown on over 700 million euros of fines farmers must pay for exceeding quotas over the years.

While the government is about to send tax collectors to the farms, many producers say they do not have the money to pay.

Italy risks exceeding EU production quotas this year after three years below the limit, meaning it faces an extra levy on stretched public finances.

Catania said the government was studying the possibility of allowing farmers to pay in installments, adding this will only be possible if it was in line with EU rules.

($1 = 0.7674 euro)

(Editing by Dan Lalor)