Alitalia and Etihad Airways have received merger clearance from the European Commission.
The merger, expected to be completed by the end of the year, will see Etihad Airways become the largest shareholder in the loss-making Italian airline as part of a €1.7 billion rescue.
Alitalia has not reported a full-year net profit since 2002, but is hoping to turn that around by 2017.
This is expected to mean the loss of up to 2,000 jobs at Alitalia, although some staff may find employment with Etihad or companies connected with the Italian carrier.
Etihad has taken equity stakes in six other airlines in the last two years.
Etihad president and CEO James Hogan said: "An equity investment in Alitalia will be beneficial not only for the both airlines, but, more importantly, it will give more choice and broader travel opportunities to business and leisure travellers into and out of Italy."
Gabriele del Torchio, COO of Alitalia, said: "This is an excellent outcome for Alitalia. This investment will provide financial stability and a foundation for impressive long-term growth for the company and for the travel and tourism industry in Italy, in which Alitalia is a fundamental player.
"Today’s decision by the EU approves the largest ever foreign investment in Alitalia and demonstrates huge confidence in the future of the national carrier."
