Abu Dhabi's state-owned Etihad Airways said on Wednesday it had agreed principal terms and conditions to buy a 49 percent stake in Italian airline Alitalia.
A tie-up with Etihad is seen as a last chance to turn around Italy's flagship carrier, which has made an annual profit only a few times in its 68-year history and received numerous state handouts before being privatised in 2008.
The two airlines will now finalise the deal as soon as possible, subject to regulatory approvals, they said in a joint statement without elaborating on the terms of the deal.
The board of troubled Alitalia voted on June 13 to accept an offer by Etihad to invest, but did not give details.
Italy's transport minister Maurizio Lupi has said Etihad is prepared to invest up to €1.25bn ($1.7bn) over the next four years.
The two carriers have been in talks since December, but a deal has so far 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 as Alitalia is expected to run out of cash by August, sources have said the company, the Italian government - which considers the airline a strategic national asset - and trade unions have little choice but to accept a deal onEtihad's terms.
Intesa Sanpaolo, which is both one of Alitalia's creditors and a key shareholder, 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.