The European Commission is launching an in-depth probe into a €300m state loan to ailing Italian airline Alitalia.

The European Union's top competition watchdog said that 'at this stage' it believed that the loan, which Alitalia has the option of converting into equity capital, was 'incompatible' with EU state aid rules.

Under the EU rules, Alitalia is banned from receiving public support until 2011 because of Italy's previous assistance to the carrier. As Alitalia has already benefited from rescue and restructuring aid, Italy cannot, in principle, grant it any more aid.

The commission said its probe into the loan would focus on whether it was made on the same terms of a private investor and would allow all interested parties to voice their opinion.

Rival airlines such as Iberia and British Airways have condemned the loan and Air France-KLM chairman Jean-Cyril Spinetta has said the Italian carrier needed an 'exorcist' to save it from  bankruptcy.

The future of the airline has been in doubt since Air France-KLM pulled its offer off the table, with Silvio Berlusconi, elected prime minister in April, promising an Italian solution to its  problems. The government has a 49.9% stake in the airline, which is losing over €2m a day.