By Giselda Vagnoni and Alberto Sisto
ROME/PARIS, Oct 7 (Reuters) - Italy's government will continue talks with top management at Alitalia on Tuesday to try to find a way to keep the cash-strapped airline in business after inconclusive talks on Monday.
Rome is looking for a public entity that could support the carrier as it readies for a tie-up with a partner, a source close to the matter said, adding that a merger with rival Air France-KLM was the most realistic option.
Transport Minister Lupi denied on Monday the government had asked Italian state railway Ferrovie dello Stato to invest in Alitalia, after reports Rome was exploring an alliance between the two to keep Alitalia out of foreign hands.
Alitalia is just one of several big corporates facing a possible foreign takeover, including Telecom Italia.
"The government never proposed that Ferrovie dello Stato invest in Alitalia. We are exploring all options for an industrial plan to safeguard a strategic asset," Lupi said, adding the meeting in Rome will continue on Tuesday.
Lupi was speaking at the end of a meeting called by Prime Minister Enrico Letta with Alitalia CEO and chairman and the representatives of Italian banks UniCredit and Intesa Sanpaolo, which lent money to the Italian carrier.
On the other side of the Alps, French Transport Minister Frederic Cuvillier also sounded a cautious note.
"It's a complex situation, in a difficult context for Air France, and dramatic for Alitalia," Cuvillier told Reuters.
The French minister said both companies would have to make sure that any plan by the Franco-Dutch carrier to raise its stake in Alitalia would not threaten Air France's restructuring programme.
Cuvillier also said a merger between the two carriers would take time. "I don't know if Alitalia has it (time)," he said.
Air France-KLM said last week it was open to raising its 25 percent stake in Alitalia and possibly merging with its Italian rival. But a deal is being held up by disagreements over strategy and finances.
Alitalia has accumulated net losses of more than 840 million euros ($1.1 billion) and debts of about 1 billion euros since being rescued by a group of Italian investors and Air France in 2009, and is fast running out of cash.
But Alitalia shareholder and Deputy Chairman Salvatore Mancuso was quoted on Monday as saying that a takeover by Air France-KLM would imply tough conditions for Alitalia, including significant job cuts and a deep restructuring of its operations.
"I don't like what Air France would like to do with Alitalia - reduce Fiumicino to their third hub (after Paris and Amsterdam)," Mancuso told Il Messaggero. And that might result in "the loss of thousands of jobs, erasing Italy's name from the main routes and preventing Alitalia from growing in Africa."
Mancuso's Equinox fund owns 3.8 percent of Alitalia.
Mancuso said a tie-up with Ferrovie dello Stato could bring synergies for Alitalia but added the railway operator, which returned to profit in 2008 after a turnaround plan, could not be a real industrial partner for the airline.
An alliance between the state railway and Alitalia would raise competition issues, Innocenzo Cipolletta, chairman of a state-sponsored private equity fund, told an Italian newspaper on Monday.
Alitalia was acquired by a group of Italian investors and Air France-KLM after it sought bankruptcy protection in 2008.