Italy's government agreed to suspend antitrust rules and amend the law to allow for a rescue of Alitalia, a government source said, and Air France-KLM opened the door to a fresh attempt at buying a stake in the carrier.

New draft legislation approved yesterday will allow Alitalia to be split into two, with its troubled units put under bankruptcy protection while 16 Italian investors pump $1.5 billion into the rest to be reborn as a smaller, leaner airline.

It is Italy's latest attempt at turning around Alitalia after a fruitless 20-month hunt for a suitor, in the hope a restructured airline would have a better chance of attracting a foreign partner to keep it flying over the long term.

Air France-KLM, which abandoned a deal to buy Alitalia this year due to union opposition, is ready to take a minority stake in the carrier if it can return to profit, a spokesman for the Franco-Dutch airline said.

The spokesman said the airline remains interested in being a strategic partner in Alitalia, she said. Air France-KLM and Germany's Lufthansa had been tipped as frontrunners to buy a stake in Alitalia after its restructuring.

Alitalia's sale adviser has already held an initial meeting with the Air France-KLM to outline its rescue plan, another source familiar with the matter has said.

Alitalia, which has steadily lost market share, passengers and money due to stiff competition from low-cost carriers, inefficiency and strikes, has not posted a profit since 1999.

The centre-right government, which had made saving Alitalia a key priority after winning April's election, also approved draft legislation to amend the Marzano law used in cases of financial crisis at major companies.

The new investors in the airline include top Italian business names like the Benettons and Roberto Colaninno, whose holding company IMMSI yesterday approved investing up to €150 million in Alitalia. IMMSI shares rose more than nine per cent following the news, and were suspended from trading.

Smaller Italian carrier Air One will also be folded into the restructured Alitalia, which is expected to focus on short- and medium-haul routes and will operate with a much reduced fleet and about 40 per cent fewer employees.

The suspension of antitrust laws agreed by the cabinet would allow the combined Air One-Alitalia to overcome objections to its overwhelming dominance of the lucrative Milan-Rome route.

The decree approved yesterday also allows a bankruptcy administrator to sell Alitalia's assets through private talks, the source said.

Small investors in Alitalia, whose shares have been suspended since June, will likely be compensated through dormant funds available to the government, the source said.

Italy's labour minister convened the airline's unions for talks on Monday. He said Alitalia workers would be given welfare benefits for seven years and the option of being absorbed by companies in the private sector.

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