Air France-KLM appeared best placed to buy Alitalia, ahead of Italian company Air One, as Alitalia's board prepared to meet on Friday on which rescue plan to recommend to the government.
The decision comes as the wide-ranging centre-left government of Prime Minister Romano Prodi reportedly remains divided between the two offers, though Prodi himself, as well as his economy and development ministers, are said to lean towards Air France.
The head of near-bankrupt Alitalia, Maurizio Prato, is also thought to favour the Air France plan.
Friday's decision, postponed for a second time on Tuesday, follows a visit to Rome on Thursday by French President Nicolas Sarkozy during which he almost certainly discussed the sale with Prodi.
Alitalia, which is losing about €1 million ($1.5 million) a day, is beset by high operating costs and fierce competition from budget rivals.
The government, which is seeking to offload its 49.9 per cent stake in the airline, reportedly fears union action over the holiday season and has said it will not announce its choice until mid-January.
Prodi, a former European Commission president, had earlier vowed to announce a decision by Christmas.
The unions, fearing fallout from restructuring -- notably sizeable layoffs -- has threatened strike action if they are not kept fully informed of the rescue plan for the airline.
Both Air France-KLM and Air One have made non-binding offers that are subject to change.
Air France is proposing a share swap that would allow Alitalia to have a place in the new entity with full rights.
The European giant is offering 35 euro cents per share along with a recapitalisation of €750 million. It would also cut some 1,500 jobs from the Alitalia workforce.
For its part, Air One proposes to merge the two Italian carriers to create Europe's fourth largest airline.
Air One, Italy's second largest carrier after Alitalia and a commercial partner of Germany's Lufthansa, would invest a total of €5.3 billion by 2012, beginning with an immediate injection of €1 billion, and renew Alitalia's ageing fleet with 130 new planes.
Backed by Italian banking giant Intesa Sanpaolo, Nomura of Japan and the US investment banks Goldman Sachs and Morgan Stanley, Air One has offered one cent per share and would trim 1,800 jobs.
The government failed to sell Alitalia by auction last July.
The long-running saga has been fraught with market-moving uncertainty. Alitalia's share price dropped 5.6 per cent to 72 cents on Monday, recovering to 79 cents by mid-morning on Friday.
A preliminary investigation has been opened into US investment funds Evergreen and Quantum for speculation in the affair after Asian giant Singapore Airlines (SIA) last week denied a report that it had teamed up with the funds to bid for Alitalia. (AFP)
Air France-KLM leads Alitalia takeover bid