Alitalia has sought bankruptcy protection after nearly two years of hunting for a buyer, paving the way for its rescue by a group of Italian investors in a coup for Prime Minister Silvio Berlusconi.

The long-awaited move by the national airline after 61 years of flying popes and movie stars during Italy's dolce vita glory days sets it up for a less glamorous rebirth as a smaller airline focused on domestic and European routes.

Alitalia has not posted profit since 1999 as it faced competition from low-cost carriers, strikes and inefficiencies. But it controls the lucrative Milan-Rome route, and its healthy units will be sold to 16 Italian investors including Intesa Sanpaolo.

"Alitalia is a company that has accumulated many errors, many losses, many conflicts," said Intesa Sanpaolo CEO Corrado Passera, who drew up the rescue plan. "It's in difficulty but has resources within that can be revived, used and relaunched."

The airline's debt and its ground service unit will be liquidated, and the state will absorb the losses, sparking an outcry from consumer groups and the opposition who say Italians will end up paying for Alitalia's rescue.

The government holds a 49.9 per cent stake in the airline. Settling Alitalia's fate is a feather in the cap for Berlusconi, who called for a patriotic rescue of the carrier after helping scuttle a deal with Air France-KLM earlier in April. Air France-KLM and Lufthansa are still tipped as front-runners to buy a minority stake in the reshaped airline, which desperately needs a foreign alliance to survive a longer term.

Ready to buy is the group of 16 Italian businessmen, led by Piaggio CEO Roberto Colaninno under the guise of Compagnia Aerea Italiana. They plan to pump €1bn (Dh5.3bn) into the airline.

The head of Air One, Alitalia's only real competitor on the lucrative Milan to Rome route, is among the investors and his company will be folded into the flag carrier, which will focus on short- and medium-haul routes.