Italian airline Alitalia faced the prospect of liquidation after a business group that had mounted a rescue bid withdrew its offer today, citing union opposition.

All members of the CAI consortium voted to abandon the offer -- a blow to Prime Minister Silvio Berlusconi, who used his business connections and political sway to persuade investors to bid for the 20,000-staff flag carrier and keep it Italian.

"The situation is dramatic and we could be facing the abyss," Berlusconi told reporters.

Asked whether this meant Alitalia's failure, Berlusconi said: "We'll see."

The government-appointed special administrator Augusto Fantozzi has repeatedly warned that if CAI's bid fell apart, he would start liquidation proceedings.

CAI said it had pulled its offer after six of Alitalia's nine unions refused to sign up to the plan, which would have seen the group snap up only the profitable parts of the carrier.

It said the airline's troubled financial situation -- Alitalia is losing 2 million euros ($2.90 million) a day -- meant negotiations could not drag on any longer.

Labour Minister Maurizio Sacconi said the withdrawal "paves the way for the failure of all the companies in the Alitalia group", blaming the "absurd position" of the unions who rejected the rescue plan.

As the news broke, a leader of one of the three biggest unions said CAI's withdrawal would be "a social catastrophe".

"The company is dead and some of my colleagues want to be its undertakers," Luigi Angeletti, head of the UIL union said, referring to other unions' refusal to agree to the deal.

Pilots' union ANPAC, which had staunchly opposed CAI's plan to slash thousands of jobs and cut salaries, said more talks could have led to a compromise.

"It's a shame. In my opinion the conditions were there for a deal. Now they (CAI) are off and we're still here with our extremely serious problems," Fabio Berti told reporters.

STAFF PROTEST

Alitalia, a national symbol for more than 60 years, has long suffered from political interference, union unrest and, more recently, from soaring fuel costs and an economic downturn stinging the travel sector worldwide.

Even Pope Benedict, who like his predecessors flies Alitalia on trips abroad, said he was praying for the airline last week.

Close to a thousand Alitalia staff at Rome's Fiumicino airport reacted angrily to news of CAI's pullout. Some staff chanted "Everyone go by train", while one flight attendant protested with a hangman's noose around her neck.

CAI's rescue plan was the third attempt in less than two years to sell the state's 49.9 percent stake in the airline, which last posted a profit in 1999.

Under the former centre-left government last year, Air France-KLM agreed to buy Alitalia. But that bid was blocked by unions and opposed by Berlusconi, then leader of the opposition. He ran a successful election campaign in April vowing to keep Alitalia alive and Italian.

Sources close to Fantozzi said he was in contact with Lufthansa, Air France-KLM and British Airways -- which he said had all expressed interest in a minority stake in Alitalia if CAI's bid had succeeded.

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