Alitalia could face collapse if a financing deal is not agreed

"A courageous plan is needed," Loyola de Palacio said in an interview with Reuters news agency.

While claiming the carrier "is bust" without major restructuring, she also warned a deal involving a major cash boost from the state would be blocked.

Alitalia plans to raise its capital by 2bn euros (�1.35bn $2.41bn) by March.

The airline is also seeking a 400m euro guaranteed loan from the government to keep it afloat after the end of September, when Alitalia says its money will run out.

But Ms de Palacio warned: "A capital increase where the state remains a majority shareholder will be rejected."

All-time lows

In the interview, she added that the government had agreed to privatise the airline within a year, but "they must draw up a plan that is acceptable to the private sector or they will have to close it down".

The government currently owns 62% of Alitalia.

Stocks in the group recently hit all-time lows, while investors are wary of buying into the loss-making airline, amid current fears over its finances.

Alitalia has yet to agree cost-cutting plans with unions, which reports claim could see up to 7,000 staff axed from its 21,000-strong workforce.

Proposals to spin off the group's ground activities will affect a further 7,000 posts.

Airline management and unions are set to hold talks over the plans on Monday.

As much as 2bn euros is thought to be needed to keep the 57-year-old airline flying.

Alitalia made a net loss of 520m euros ($628m; �350m) in 2003 after making a profit the year before.