* Fresh loans less than 200 mln euros initially sought
* Loans a bridge gap solution while talks with Etihad continue
* Lufthansa says Etihad-Alitalia deal would be unfair competition (Recasts with financing deal, adds Lufthansa, analyst)
By Paola Arosio
MILAN, Feb 3 (Reuters) - Italian airline Alitalia finalised loan agreements with banks for 165 million euros ($223 million) on Monday, two sources close to the matter said, below the 200 million initially sought, but keeping it flying while it searches for a partner.
The loans are part of a 500 million euro emergency package put together last year to give the troubled airline enough cash while it restructures and finalises talks with Etihad Airways on a possible investment.
"Alitalia has asked for 200 million euros and we have come down to 165 million, a sufficient sum to plug the gap until Etihad makes a decision," one of the sources said.
The bank financing and a 300 million euro capital increase completed in December are expected to keep the carrier in the air for about six months, analysts have said. But the airline urgently needs a strong industrial partner such as Etihad to remain profitable in the long term.
Alitalia offers access to Europe's fourth-largest travel market and flies 25 million passengers a year, but has been hit by competition from low-cost carriers and high-speed trains.
Alitalia and Etihad Airways are in the final phase of due diligence for a possible investment by the Abu Dhabi group in Alitalia, the companies said on Sunday.
Italy's two top lenders UniCredit and Intesa Sanpaolo have pledged 70 million euros each, troubled bank Monte dei Paschi di Siena 10 million euros and Banca Popolare di Sondrio 15 million euros.
UniCredit, Intesa and Monte Paschi were not immediately available to comment.
A tie-up with Etihad could boost Alitalia's liquidity and allow it to invest in a new strategy focused on long-haul routes that could make it profitable again, analysts have said.
"In the near term Alitalia needs 2 billion euros to revamp its operations and not be kept on life support the way it has been until now," said Andrea Giuricin, CEO of TRA Consulting.
Alitalia's revised industrial plan - which includes cost cuts of around 300 million euros - and the airline's debt of 813 million euros at end-September are at the centre of the tie-up talks with Etihad.
One of Etihad's conditions is for creditor banks to write off parts of the airline's debt, a source close to Alitalia said, a request the banks have so far refused to agree to.
Lack of agreement over a debt restructuring had also contributed to Alitalia's former top shareholder Air France-KLM's decision to shun the Italian firm's cash call. This resulted in Air France-KLM's stake in the Italian carrier falling to around 7 percent from 25 percent.
"We are in the most delicate phase of the talks ... but I have no doubt that all will do their part," Alitalia CEO Gabriele Del Torchio told RAI Radio1 earlier on Monday.
The talks have sparked protest from competitors. Germany's largest airline Lufthansa called on European regulators to block Etihad from investing in Alitalia, saying it would amount to unfair competition.
Del Torchio said that while Alitalia was pursuing a tie-up with the Gulf carrier, Air France-KLM remained a key partner.
"We have a commercial agreement with them that will last at least until 2017, and they remain therefore a vital partner," Del Torchio told the radio station.
Alitalia and Air France-KLM are both members of the SkyTeam alliance, a group of 19 airlines with a seat-sharing agreement.
The Franco-Dutch group's CEO said last month the airline would look at reinvesting in Alitalia if its conditions on debt restructuring and cost cuts were met. ($1 = 0.7415 euros) (Additional reporting and writing by Agnieszka Flak; Editing by Jane Merriman and David Evans)