Outgoing Italian Government Holds Emergency Talks on Alitalia Rescue

Italy's outgoing cabinet is meeting tonight in an emergency session to decide whether to sink yet more taxpayers' cash into troubled airline Alitalia.

Air France-KLM formally withdrew its offer for the company yesterday and its shares were suspended on the Milan bourse pending the outcome of the cabinet meeting.

In Brussels, officials warned that a new loan for the stricken flag-carrier would provoke a crisis in relations between Italy and the European Commission. But the defeated center-left Democratic party holds incoming prime minister Silvio Berlusconi responsible for driving away the airline's would-be buyers.

Funds of €100m-150m (£80m-120m) would allow Alitalia to remain airborne for several weeks after Italy's new right-wing government takes office next month.

Berlusconi, who made rejection of the Franco-Dutch bid central to his election campaign, would then have to make good on his claim that a consortium of Italian financiers and industrialists is ready to snap up the loss-making, debt-laden airline.

According to some reports, the government is considering defending the subsidy as essential to the maintenance of public order. An official in Brussels told Reuters that if Italy was unable to justify the loan, "then make no mistake the commission will come down very hard and will move as quick as possible".

A terse statement from Air France-KLM gave no reason for the company's decision to pull out. Nor did it specifically exclude a resumption of talks. But, with a hostile government in the offing, fuel prices soaring and the Italian trade unions still refusing to accept the terms of the group's bid, Alitalia is scarcely an inviting purchase.

In an apparent allusion to Berlusconi, the Democratic party blamed the collapse of negotiations on "reckless comments and irresponsible behaviour". There is scant evidence of his vaunted rescue operation.

The managing director of Intesa SanPaolo bank, Corrado Passera, dropped the merest of hints today that it might get involved, despite earlier denials. Passera said his bank "had never shrunk from solid industrial projects [or] projects with international prospects".

There were also signs that Berlusconi's plan to retain Alitalia's "Italian-ness" could involve Aeroflot. A spokesman for the Russian airline said it had received an "instruction" in connection with Alitalia from President Vladimir Putin, who visited Berlusconi last week at the billionaire's Sardinian villa.