Alitalia celebrated a breakthrough in talks with Etihad on Sunday which could see the UAE carrier buy up to 49 percent of the stricken Italian flag carrier.
The proposed deal to save the airline, which would otherwise risk bankruptcy, "is excellent for Alitalia, this investment will ensure financial stability," Alitalia chief Gabriele Del Torchio said, without revealing the details of the latest tie-up proposals.
The go-ahead came in the form of a letter to Alitalia, which Etihad said "specifies the conditions and criteria for the proposed capital investment."
"We are pleased to be able to proceed and trust we'll be able to conclude the deal proposed to Alitalia," Etihad Airways chief James Hogan said in a joint statement from the two companies.
The development follows months of negotiations over stumbling blocks such as the debt restructuring demanded by Etihad in exchange for its investment.
"Today is an important day for Alitalia, I would say a decisive day for our flagship company and for the whole of the Italian airline transport sector," said Transport Minister Maurizio Lupi.
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Etihad is reported to be considering investing up to 560 million euros ($763 million) in a "new company", while the current shareholders would keep their 51-percent share by taking part in a capital increase of 200 million euros.
Italian media said Etihad in return wanted 3,000 redundancies, more than the 2,000 already negotiated by management.
The majority of Alitalia's debt, the cost of redundancies and ongoing legal disputes would go into a holding company controlled by the consortium.
Italy's top business daily Il Sole 24 Ore warned that transforming Sunday's proposals into a contract "is a task not without obstacles," adding that the next stage of negotiations could "last up to a month."
Alitalia has been through years of crises and was at one point hoping for a rescue from Air France-KLM.
It was bailed out by the state in 2008 to the tune of 300 million euros when it was taken over by a consortium of private investors.