MILAN (Reuters) - Broadcaster Mediaset expects a 17-fold increase in its Italian operating profit by 2020 by completely rethinking the strategy of its pay-TV arm Premium after a deal to sell the unit to France's Vivendi fell through.

The two companies have been at loggerheads since July when Vivendi ditched an agreement to take control of Mediaset's pay-TV unit, Premium, and give the two companies shareholdings in each other.

The spat was aggravated by Vivendi's stake-building in December which made it the second-largest shareholder in the Milan-based TV group with a stake of 28.8 percent.

Mediaset, controlled by former prime minister Silvio Berlusconi, said on Tuesday it expected earnings before interest and taxes (EBIT) for its Italy operations to grow by 468 million euros ($500 million) by 2020.

That compares with an EBIT for its Italian business of just 26.8 million euros in 2015, significantly lower than the 104 million euros recorded in the previous year.

"A crisis can create an opportunity, (Mediaset) had to offset the impact of a deal that went belly up," a source close to the matter told Reuters.

The source added that the group aimed at completely changing its current strategy, steering it toward a "new model" of pay-TV, as it faces increasing competition from online providers such as Netflix and Amazon.

The Milan-based TV group said it aimed to make its pay-TV channels, currently exclusive to its over 2 million subscribers, and content available to other market players.

It added that its new strategy envisaged a move into digital production, with "online first" content.

The company is looking for co-production work with European broadcasters, in line with the recent agreement between France's TF1 and German ProSiebenSat.1 to join forces in the rapidly growing market for video content broadcast on internet platforms such as YouTube.

Mediaset also said advertising sales in 2016 grew 4 percent, or 2.8 percent if its newly acquired radio stations were not included.

(Reporting by Giulia Segreti; Editing by Stephen Jewkes/Ruth Pitchford)