Etihad Airways will take up a 49% stake in Alitalia, giving the Gulf carrier a strategic foothold in the European market.
In a statement issued to the media, Etihad said that both airlines had agreed to the principal terms and conditions of Etihad's equity stake in the Italian airline and would "move to finalise the transactional documents, that will include the agreed upon conditions, as soon as possible."
Italy's transport minister has previously said that Etihad is prepared to invest up to €1.25 billion (A$1.82 billion) over the next four years to turn around the troubled airline.
Alitalia has been unprofitable for years and only last year received a €500 million (A$727 million) bailout from the Italian government.
Earlier this month Alitalia CEO Gabriele Del Torchio pegged Etihad's proposed equity investment at €560 million (A$814 million) for 49% but said this would require the elimination of around 2,200 jobs, or 15 percent of Alitalia's work force.
The investment is subject to final approval from European regulators but is certain to attract renewed criticism from rival European carriers such as Lufthansa.
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