If a deal is struck, Alitalia will be rescued from the threat of bankruptcy, and fast-growing Etihad will take a big step forward into Europe and win some trans-Atlantic routes.
Alitalia's chief executive Gabriele Del Torchio was due to present an outline for an agreement at a meeting with Etihad boss James Hogan in Abu Dhabi on Tuesday.
Negotiations have dragged on for weeks and have stumbled on the key issue of debt restructuring demanded by Etihad in exchange for its investment.
Alitalia has been through years of crises and was at one point hoping for a rescue from Air France-KLM.
UniCredit bank chief Federico Ghizzoni -- a member of the Italian consortium that owns Alitalia - on Monday said the offer from Del Torchio would be "concrete".
"Every bank has its own interests but the proposal has been agreed by all of us... We'll see what the reaction is," Ghizzoni told reporters.
Italian media have raised the possibility of Alitalia being split into a new company for the Etihad deal and a "bad company" with unwanted debts and personnel.
But Transport Minister Maurizio Lupi ruled out the option, saying it would demand more from the state.
Lupi compared the proposal to a previous rescue of Alitalia in 2008 when the state bailed out the airline to the tune of €300 million when it was taken over by a consortium of private investors.
"The answer for Alitalia is not a 'bad company' or a 'new company' based on models from the past," Lupi said.
"A major industrial partner has to be found that can relaunch the company internationally to turn it once again into a major intercontinental carrier," he said.
Lupi said the partnership would be "a good alliance for Italy's entire airport sector and for Alitalia".
Thousands of jobs at stake
The Messaggero daily said Etihad could invest up to €560 million in a "new company", while the current shareholders would keep their 51-percent share by taking part in a capital increase of €200 million.
The new Alitalia would have around 10,000 personnel and hold on to the slots and flights it required.
The majority of Alitalia's debt, the cost of redundancies and ongoing legal disputes would instead go into a holding controlled by the consortium.
Italian media said Etihad wanted 3,000 redundancies, more than the 2,000 already negotiated by management.
The Alitalia issue remains politically sensitive, even though the company was privatised years ago.
"We hope that thousands of jobs and Italy's future won't be sold at a knock-down price to the Arabs," Matteo Salvini, head of the anti-immigration Northern League, told supporters during the campaign for European elections.
As he showed off new exclusive services on Etihad's fleet of Airbus A380s and Boeing B787 Dreamliners, Hogan on Sunday declined to comment on the discussions.
The two companies have been in negotiations since December and in February announced that they had entered a final phase of due diligence assessment.
As the negotiations proceeded, Hogan met Italian Prime Minister Matteo Renzi last month.
No details from the talks filtered out but reports said Etihad was demanding a high-speed rail line connecting Rome airport to the city and regulatory changes to open Milan-Linate airport to non-European flights.
Italy has also apparently been asked to abolish regional subsidies that have favoured low-cost carriers.
Different media reports said the possible stake that Etihad would take range between 40 percent and 49 percent - the maximum limit for non-European airlines.
Italy is the fourth-biggest air transport market in Europe and access would allow Etihad to take away market share from German carrier Lufthansa and its hub in Frankfurt as well as tap into business travellers based in wealthy industrial regions of northern Italy.