Banks and creditor companies have been watching Alitalia closely

Chief executive Giancarlo Cimoli had warned unions that failure to strike a deal could mean the end for the firm.

The agreement will boost productivity and streamline management, as well as giving greater labour flexibility.

It also paves the way for a the firm's new business plan, which has been eagerly awaited by creditor companies.

Alitalia is planning to boost its capital by as much as 1.2bn euros later this year and Mr Cimoli needs to show investors that he can halt the company's losses and make it a viable business.

In the meantime, the government is providing loans to keep the company running.

'Essential element'

Alitalia said it will meet on Friday to discuss a new business plan that will run until 2008.

"The agreement thus contributes to the launch of a recapitalisation, which is an essential element for giving certainty to the company and employees," Alitalia and the unions said in a statement.

The deal covers pilots, flight attendants and ground staff, and is part of 170m euros of cost cutting that need to be identified.

There had been rumours that the company would announce a number of job cuts and wage reductions. A spokesman said that the deal does not include job cuts or pay reviews.