Alitalia's sale faces the risk of being grounded

It said it took the decision because Alitalia's "sustainable growth" would be compromised by the sale conditions.

The group led by Air One was the last serious contender for the stake in loss-making Alitalia after Russian airline Aeroflot pulled out last month.

Its withdrawal threatens to derail the Italian government's plans to privatise the national carrier.

Interested parties have until 23 July to make legally binding offers for the government's stake - up to a maximum of 49.9% - it plans to sell.

The deadline has been extended twice and the bidding process has been further confused by uncertainty over Alitalia's true financial situation.

Sale collapse?

The departure of Air One from the bidding process leaves a US private equity group, Matlin Patterson Global Advisers, as the sole declared suitor for the purchase.

But Italy's transport minister Alessandro Bianchi has expressed doubts that the buyout fund will make a bid, saying their tender doesn't "give big signs of life".

Air One said it "decided to pull out of the bidding because the sale conditions do not allow for a presentation of an offer".

The small domestic airline added it would "require different acquisition conditions that would make possible Alitalia's sustainable and competitive growth", but no further details were given.

Aeroflot said it had pulled out because it had been unable to obtain "critical information with respect to the commercial and operational aspects of Alitalia's business".

Air France was most recently tipped as a possible Alitalia saviour but reports that the French airline could enter the fray have so far been denied.

Alitalia has not made an annual profit since 2002, suffering from fierce competition, high fuel costs and crippling strikes by employees.