Italy's national carrier has already received government aid

Rival European airlines had opposed the plan, arguing it included illegal state aid for the loss-making carrier.

But EU officials said the restructuring, which includes a 400m euro ($495m; �275m) Italian government loan, did not amount to state aid.

Under the plan, Alitalia will be carved up and receive a capital increase of up to 1.2bn euros.

'Real setback'

"On the basis of a thorough and detailed analysis, the Commission has concluded that these recapitalisations do not involve any state aid," said Transport Commissioner Jacques Barrot.

This decision is a real setback to the much-needed consolidation of the European airline industry British Airways

EU rules prevent European airlines from receiving state aid more than once, under the principle known as 'one time, last time'.

Alitalia, which reported losses of 812m euros last year, was given financial support by the Italian government in 1997.

The EU announcement was welcomed by Rome but criticised by other European airlines.

German national carrier Lufthansa said it was studying the EU decision and would consider launching a complaint.

A spokeswoman for British Airways said: "This decision is a real setback to the much-needed consolidation of the European airline industry."

Vital boost

The turnaround plan would see Alitalia split into AZ Fly, which will handle air operations, and AZ Services, which will deal with ground operations.

"The state's minority participation in the future 1.2bn euro increase in the capital of AZ Fly must take place at the same price and under the same conditions as private investors," the Commission said.

Italy's transport minister Pietro Lunardi said the EU decision was a vital boost for Alitalia, but added Italy's flag carrier faced turbulent times ahead.

"(The) decision does not represent in itself a resolution of Alitalia's crisis," he said.

Alitalia hopes the restructuring will save the company from bankruptcy and eventually lead to a strategic alliance with other European carriers, including the possibility of a much-anticipated tie-up with Air France and KLM.