Alitalia is seeking a tie-up with Air France and KLM

The decree paves the way for the radical restructuring needed to restore the ailing airline to financial health.

State control has also been a barrier to Alitalia joining a merger between Air France and Dutch carrier KLM.

Selling down of the state's 62% stake in the airline could entail share swaps, a public share offering or a straight sale, the government said.

Alitalia has already approved plans for a radical shake-up, including cutting at least 2,700 jobs by 2006.

Troubled industry

Financial difficulties, exacerbated by a global slump in the airline industry, led Air France and KLM to rebuff Alitalia's bid to join their merger, valued at about 784m euros (�543m).

Alitalia is expecting operating losses of 410m euros this year, having lost 233m euros in 2002.

The airline still hopes to join the deal as early as April next year. Analysts say this is an ambitious target made slightly more plausible by the government's go-ahead for privatisation.

Issues yet to be resolved include how much of the stake the state will sell and whether it would want to keep a blocking share.

The airline also plans to invest 1.2bn euros in upgrading its fleet over the next three years as part of the shake-up, which has also seen senior management imported from the US.

But radical changes in the Italian air industry are likely to meet opposition from trade unions and political factions, including some in the government coalition, resisting loss of control over the national carrier.