Abu Dhabi's Etihad Airways is in early-stage talks over a possible 300 million euro ($413 million) investment in Alitalia, a political source close to the matter said, which could help rescue the loss-making Italian airline.

Etihad, which has been expanding its international network to compete with Middle Eastern rivals Emirates Airline and Qatar Airways, confirmed on Thursday it was in talks with Alitalia but did not comment on the size of any investment.

Alitalia's survival is a big issue for Italy's fragile coalition government, which regards the airline as a strategic national asset.

The government, which is set to hold an indirect stake in the airline via the state post office, wants any new investor to stump up enough money to fix Alitalia - a sum analysts estimate could be as high as 4 billion euros.

But any substantial overhaul demanded by a foreign investor that involved cuts to the airline's 14,000 staff would likely anger politicians battling high unemployment.

"We will find out in the next few days if there is real interest (from Etihad)," Transport Minister Maurizio Lupi said.

Alitalia offers access to Europe's fourth-largest travel market and flies 25 million passengers a year. But the airline, which loses 700,000 euros a day and has net debt of more than 800 million euros, urgently needs to find a partner willing to make it profitable in the longer term.

A 300 million euro investment would give Etihad a stake of around 40 percent in Alitalia, analysts said, enough to secure sufficient management and strategy influence.

But Etihad still has many questions about Alitalia and would make a decision later this week on whether to continue taking a closer look at its books, a financial source close to the talks said.

Etihad and Alitalia, which already jointly operate flights between Abu Dhabi and the Italian cities of Rome and Milan using code sharing agreements, declined to comment on the potential investment.

OTHER OPTIONS

Alitalia raised 300 million euros in an emergency cash call earlier this month, including an investment by the state-owned postal service, which analysts said would keep it flying for the next six months.

The political source said other longer-term options were being considered, including a possible re-engagement of shareholder Air France-KLM, which snubbed Alitalia's cash call insisting on a tough restructuring of the airline's debt.

"It is possible that Air France-KLM may re-enter the game," the source said, in a bid to prevent competition from Etihad on European routes.

Air France-KLM, once Alitalia's biggest shareholder with 25 percent, let its stake fall to around 7 percent.

Like Air France-KLM, Etihad would likely insist on strict conditions for any investment in Alitalia.

"Etihad will not put any money into Alitalia without proper guarantees," a Milan-based analyst said. "These negotiations will likely drag well into early next year and if they succeed, could be a huge boost for Alitalia's long-haul ambitions."

Alitalia needs money to invest in the more lucrative long-haul routes after a previous focus on domestic and regional flights backfired in the face of competition from budget carriers and high-speed trains.

While Air France-KLM is in the midst of its own restructuring, cash-rich Etihad is seen as a solid partner that could revive Alitalia, analysts said.

The United Arab Emirates carrier has been aggressively growing its international network over the past ten years through minority stake purchases and codeshare agreements.

Etihad, whose annual net profit tripled in 2012, holds stakes in Virgin Australia, Air Berlin, Aer Lingus and India's Jet Airways among others.

Other Alitalia shareholders include a disparate group of Italian investors with little knowledge of the airline market. – Reuters