In a joint-statement on Sunday, Etihad said it will send a letter to Alitalia laying out the terms and conditions, which will need to be approved by Alitalia's board before final talks.
“We are delighted to be able to move forward with this process and look forward to the successful conclusion of the proposed transaction with Alitalia,” President and Chief Executive Officer of Etihad Airways, James Hogan, said.
“An equity investment in Alitalia will be beneficial not only for the both airlines, but, more importantly, it will give more choice and broader travel opportunities to business and leisure travellers into and out of Italy.”
According to Italian media reports on Thursday, Etihad is set to invest €500 million in Italy's flagship carrier as part of a “strategic alliance” that will see it take a 49 percent stake.
“This is an excellent outcome for Alitalia," Gabriele Del Torchio, Chief Executive Officer of Alitalia, said in the statement.
"This investment will provide financial stability and confirms Alitalia's key strategic role as an infrastructure player in the travel and tourism industry in Italy for long-term growth.”
Talks between the two companies got underway in December, around the time analysts said the heavily-indebted Alitalia would be bankrupt within six months unless a partner was found.
Alitalia has been through years of crises and was at one point hoping for a rescue from shareholder Air France-KLM.
In early May, it was reported that 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.