(Updates with comments on talks, paragraphs 4, 7-10)

KABUL, March 16 (Reuters) - The Taliban have killed an Afghan driver kidnapped with an Italian journalist after convicting him of spying, a rebel spokesman said on Friday.

He added that the fate of La Repubblica reporter Daniele Mastrogiacomo, also accused of spying, and his Afghan translator would be decided later, but gave no details of timing.

Spokesman Mullah Ibrahim Hanifi, speaking by phone from an undisclosed location, said Mastrogiacomo's driver had been killed on Thursday. Italian news agency ANSA earlier quoted Hanifi as saying the man's throat had been cut.

"On the very first day, he had confessed that he was spying for the foreign forces," Hanifi told Reuters. "He confessed it repeatedly and a Taliban court ordered his killing yesterday and he was killed."

Italian Foreign Minister Massimo D'Alema appealed for time and Prime Minister Romano Prodi cancelled a trip to his hometown of Bologna so he could stay in Rome for the weekend to tend to the hostage crisis, sources at his office said.

"We were all struck by the dramatic news and we have also multiplied our efforts to find ways to reach a solution and obtain the liberation of Daniele Mastrogiacomo," D'Alema told reporters in Rome.

"We need time. This issue cannot be resolved quickly."

POSITIVE SIGNALS?

Hanifi said the remaining two hostages would be released if the Afghan government freed three Taliban prisoners, ANSA reported.

Afghan news agency Pajhwok said the Taliban had extended the deadline for the remaining two men by three days and quoted a Taliban spokesman as saying there had been "some positive signals" on Friday during behind-the-scenes negotiations.

The head of an Italian aid agency in Afghanistan, which received a video of the hostage this week from the Taliban, also spoke of "some positive signals".

"It has been a very intense and difficult day," said Gino Strada, head of aid group Emergency, which describes itself as "independent and neutral" and offers medical assistance to people wounded in war.

"But I think there is good reason to think that there are positive signals in the negotiations for Daniele Mastrogiacomo's release," ANSA quoted Strada as saying in Kabul.

Mastrogiacomo and his two colleagues were seized in the lawless southern province of Helmand last week and the Taliban said he had confessed to spying for British troops.

La Repubblica denied the reporter was a spy and said the Karachi-born man had been writing for them since 1980 and reporting from Afghanistan since Feb. 28.

In the video released on Wednesday, Mastrogiacomo appealed to the Italian government to work for his freedom. In an audio message released on Thursday he said his captors would kill him unless their demands were met within two days.

It had been reported that the Taliban were demanding Italy withdraw its troops from Afghanistan and insisting on the release of one of their spokesmen captured in January.

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