The airline said in a statement it had submitted a declaration of bankruptcy to a Rome court for approval.

Prime Minister Silvio Berlusconi's government named former finance minister Augusto Fantozzi as the special administrator for Alitalia following the announcement.

On Thursday, the government adopted a new bankruptcy bill which laid the groundwork for Alitalia's rescue by allowing failing companies to speed up certain procedures such as selling shares and laying off workers.

The bill also relaxed certain anti-trust rules so as to allow Italy's second carrier Air One to take part in Alitalia's rescue which will see its profitable operations moved into a new company financed by a series of new investors.

This company will form the basis for the new airline.

Its unprofitable businesses and debt will be taken over by another company.

On Thursday, Prime Minister Silvio Berlusconi said the plan meant Alitalia would remain under Italian control, allowing foreign participation only on a minority basis.

'The management of Alitalia will remain in the hands of Italians,' Mr Berlusconi said. 'Prospective foreign partners will take a stake (in the new company) only as minority shareholders.'

Air France-KLM, which was spurned as a buyer in April, said on Thursday it was ready to take a minority stake in the new company being set up to relaunch Alitalia.

Talks between Air France-KLM and Alitalia on a full takeover and rescue collapsed in April when the airline's future became an issue in elections won by Berlusconi who promised voters an 'Italian solution' to its problems.

Alitalia's debt reached 1.7 billion euros (3.5 billion) by July 31, the company said in a statement on Friday.

Italian media reported on Tuesday that 16 investors had pledged to support the new company, including top names in Italian industry and finance, with a total commitment likely to be worth around one billion euros.

Economic daily Il Sole 24 Ore said on Thursday the new company was expected to turn an operating profit of 250 million euros in 2011.

The daily La Repubblica said it would focus on short- and medium-haul routes, serving 140 destinations rather than the current 190, while up to 7,000 jobs would be cut.

Alitalia employs 11,100 people in its air transport operations and a further 8,300 in maintenance and services.

The company, in which the Italian state has a 49.9 per cent stake, has been surviving on a loan of 300 million euros made in late April from public funds after the collapse of the takeover talks with Air France-KLM.

Mr Roberto Colaninno, head of the Piaggio manufacturing group and designated to head the new company, told media on Friday that other than Air France-KLM, Germany's Lufthansa was also in line for minority participation. -- AFP