Alitalia chairman Maurizio Prato has to find a new investor

The Franco-Dutch airline will face competition from Italian airline Air One and a consortium led by Italian lawyer Antonio Baldassarre.

Alitalia initially identified six possible bidders for the government's 49% stake which ministers want to sell.

High costs, tough competition and frequent strikes have plunged Alitalia into a precarious financial position.

'Comatose'

Alitalia's board plans to announce a preferred bidder within the next few days, with a view to concluding a deal before Christmas.

"The point is to have an industrial plan that can turn around and strengthen the company," Italian Prime Minister Romano Prodi said on Wednesday.

This major step in European consolidation would not only be beneficial for passengers but would also meet the requirements for the group's economic and financial stability Air France KLM statement

Previous efforts to sell off the airline have foundered on concerns about its financial position and conditions attached to the sale.

Experts said investors had been put off in the past by a lack of clarity about the firm's finances and obligations regarding future service levels.

The airline has cut back on services in recent months and its chairman Maurizio Prato recently described the firm as "comatose".

Ministers will be encouraged by Air France KLM's interest although disappointed that German airline Lufthansa decided not to make a bid.

"This major step in European consolidation would not only be beneficial for passengers but would also meet the requirements for the group's economic and financial stability," Air France KLM said in a statement.