Brussels gave the merger the go-ahead under the condition that the airlines opened up the Rome-Belgrade route to competitors.
After months of difficult negotiations, Etihad and Alitalia signed a deal on August 8 for the Emirates national carrier to become a shareholder in Italy's flagship but debt-laden airline, in a move that will widen Etihad's reach into the European market.
"The European Commission has cleared... the proposed acquisition," the commission said in a statement.
But it added: "The decision is conditional upon Alitalia CAI and Etihad's commitment to, in particular, release slots to a new entrant at the airports of Rome Fiumicino and Belgrade."
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Etihad, based in Abu Dhabi, is expected to invest 560 million euros ($750 million) to become the main stakeholder in the Italian airline, which has lurched from crisis to crisis for years.
Key stumbling blocks in the drawn-out merger negotiations were Alitalia's debt of about 1.0 billion euros and overstaffing issues.
Both airlines hailed the go-ahead.
"We are delighted to be able to move forward with this process and look forward to ... the final conclusion of a our transaction with Alitalia," Etihad chief James Hogan said.
Alitalia boss Gabriele del Torchio added: "This is an excellent outcome for Alitalia. This investment will provide financial stability and a foundation for impressive long-term growth for the company."
Etihad has expanded hugely since it was founded in 2003 and now has stakes in India's Jet Airways, Air Serbia, Air Seychelles, Aer Lingus and Air Berlin.