Alitalia and Etihad Airways have agreed that the Emirates airline will acquire 49% of the Italian company, the two companies said in a joint statement today.
The two airlines said they had agreed the "terms and conditions of a proposed transaction whereby Etihad Airways will acquire a 49% equity stake in Alitalia,".
They also said they would tie up the deal as soon as possible subject to approval from regulators.
A tie-up with cash-rich Etihad is seen as a last chance to turn around Italy's flagship carrier, which has made an annual profit only a few times in its 68-year history and received numerous state handouts before being privatised in 2008.
The board of troubled Alitalia voted on June 13 to accept an offer by Etihad to invest, but did not give details.
Italy's transport minister Maurizio Lupi has said Etihad is prepared to invest up to €1.25 billion over the next four years.
The two carriers have been in talks since December, but a deal has so far been elusive due to Italy's reluctance to bow to Etihad's conditions over job cuts of around 2,200 and a restructuring of the airline's debt.
But as Alitalia is expected to run out of cash by August, sources have said the company, the Italian government - which considers the airline a strategic national asset - and trade unions have little choice but to accept a deal on Etihad's terms.
A stake in Alitalia, which offers access to Europe's fourth-largest travel market and flies 25 million passengers a year, would further Etihad's efforts to expand its reach in Europe after already taking strategic stakes in Aer Lingus and Air Berlin.
The Abu Dhabi carrier and its regional rivals have utilised their strategic global location and government support to draw passengers away from traditional hubs in Europe and Asia to the Middle East.