"The due diligence has been completed. The letters of intent are being drawn up in these days," Transport Minister Maurizio Lupi said at a Senate
Italian business daily Il Sole 24 Ore also on Tuesday cited informed sources as saying that Alitalia's chief executive Gabriele del Torchio and Etihad chief James Hogan "could meet this week" to discuss the deal.
The report said Etihad was planning to buy a stake of around 40 percent, which would make it by far the biggest shareholder in the carrier and respect the 49.9 percent limit for non-European airlines.
It also said Etihad could invest between €300 million and €500 million ($414 million and $690 million) in return for a restructuring plan that would
include up to 3,000 job cuts and an upgrade of infrastructure.
Alitalia in February reached a deal with trade unions for the equivalent of 1,900 job cuts and in September last year shareholders gave unanimous approval for a capital increase to save Alitalia from bankruptcy.
Etihad is expanding rapidly and has bought minor shares in several smaller carriers including Air Berlin and India's Jet Airways as it competes with
larger Gulf rivals Emirates and Qatar Airways.