The Italian government is preparing to initiate bankruptcy proceedings for state-controlled carrier Alitalia, possibly as early as Friday.

A significant portion of the loss-making airline will be liquidated and the remainder merged with privately owned Italian domestic carrier Air One. The new carrier will be owned by a consortium of Italian investors, however the government also hopes to attract investment from a major European carrier and proposes talks with Air France-KLM and Lufthansa.

The liquidation will lead to at least 5,000 job losses and almost certainly trigger union resistance.

Air France-KLM pulled out of a deal to take over Alitalia early this year in the face of union opposition. It is unclear what interest it or Lufthansa would have in a carrier they did not control.

Prime minister Silvio Berlusconi returned to office in April pledged to keep Alitalia in Italian hands. The airline is forecast to report a loss of Euro 400 million for the first half of this year and has debts of more than Euro1.1 billion.

Separately, Lufthansa has confirmed it is considering a bid for Austrian Airlines.