By Stanley Carvalho

Abu Dhabi's state-owned Etihad Airways said on Wednesday it had agreed principal terms and conditions to buy a 49 percent stake in Alitalia in a last-ditch attempt to save the loss-making Italian carrier.

Italy's flagship airline has made an annual profit only a few times in its 68-year history and received numerous state handouts before being privatised in 2008.

It was kept afloat by a government-engineered 500 million euro ($680 million) rescue package last year but risks having to ground its planes unless a deal can be struck with cash-rich Etihad to allow it to revamp its flight network.

The two airlines will now finalize the deal as soon as possible, subject to regulatory approvals, they said in a joint statement without elaborating on the terms of the deal.

Alitalia's board voted on June 13 to accept an offer by Etihad to invest in the airline, but did not give details.

Italy's transport minister Maurizio Lupi has said Etihad is prepared to invest up to 1.25 billion euros ($1.7 billion) over the next four years.

The two carriers have been in talks since December, but a deal had been elusive due to Italy's reluctance to bow to Etihad's conditions over job cuts of around 2,200 and a restructuring of the airline's debt.

But with Alitalia expected to run out of cash by August, sources have said the carrier, Italy's government - which considers the airline a strategic national asset - and trade unions have little choice but to accept a deal on Etihad's terms.

Lupi said on Wednesday that the two airlines had met with Alitalia's creditors, which include Italy's two largest banks Intesa Sanpaolo and UniCredit, on Tuesday, adding that "decisive steps forward" had been made.

"It's increasingly clear that this marriage should happen because it's obvious to all that we are dealing with a strong industrial investment that will offer our airline concrete growth prospects," the minister said in a statement.

"I'm confident that this operation will come to a good end."

He added that a meeting with unions and the labour minister would happen soon to discuss the question of layoffs.

Intesa Sanpaolo, which is a key Alitalia shareholder as well as a creditor, is convinced a deal on debt restructuring will be reached, hopefully by the end of July, the chairman of the bank's management board Gianmaria Gros Pietro said on Tuesday. Gros Pietro said July 31 was the date set by Etihad to conclude the deal.

Options under discussion include the banks writing off parts of the debt and converting the remainder into equity.

A union with Etihad could bring Alitalia the money it needs to invest in a new strategy focused on long-haul routes, after it has struggled to compete against low-cost airlines and high-speed trains on domestic and regional routes.

A stake in Alitalia, which offers access to Europe's fourth-largest travel market and flies 25 million passengers a year, would further Etihad's efforts to expand its reach in Europe after already taking strategic stakes in Air Berlin and Aer Lingus.

The Abu Dhabi carrier and its regional rivals have utilised their strategic global location and government support to draw passengers away from traditional hubs in Europe and Asia to the Middle East.