The deal with the Abu Dhabi-based airline is part of a 1.76 billion euro (1 billion pound) rescue plan for Alitalia, which doubled its net loss to 569 million euros last year, providing it with funds to invest in more profitable long-haul routes and reduce its dependence on domestic and regional services.

"We're going to allow our stake in Alitalia to be diluted whilst hoping to maintain our partnerships, which function very well," Air France-KLM Chief Executive Alexandre de Juniac said at a meeting at the European American Press Club.

Air France-KLM has already allowed its holding to fall to around 7 percent from 25 percent following a capital increase in which it did not take part.

(Reporting by Cyril Altmeyer; Editing by Blaise Robinson)