MILAN/ROME (Reuters) - Italy's government scrambled to salvage Air France-KLM's collapsed deal to buy Alitalia yesterday, promising to keep the airline flying despite a looming cash crisis.

The state-controlled carrier, whose fate has become a top campaign issue ahead of Italy's general election in 10 days, has said its cash will run out in a few months unless a new owner steps in to pump more money into its coffers.

Italy's government said in a statement it would verify if Air France-KLM's decision to back out was final and committed itself to keeping its national carrier in operation.

The European Union has banned further state aid, but the government can put Alitalia under emergency administration, which would allow it to operate with protection from creditors — roughly simliar to US bankruptcy procedures.

Italy's economy minister overseeing the sale and analysts say that is Alitalia's only alternative to the French deal.

"Alitalia is no longer able to stand on its own two feet," said Edoardo Staunovo Polacco, a bankruptcy law lecturer at Bocconi University. "Either it must be saved by another party or it is inevitable it will go into special administration. It doesn't have any more money and cannot get any from the state."

Once a proud symbol of Italy's post-war economic boom, Alitalia has been felled by tough competition, soaring fuel prices and frequent labour strikes. It has posted a profit only four times in the past 15 years.

The board of Alitalia, in which the Italian state has a 49.9 percent stake, held crisis talks yesterday and must soon appoint a new chief. Chairman Maurizio Prato quit yesterday saying the company was cursed.

The economy ministry urged the airline's board to take urgent action to ensure it keeps flying.

Unions and politicians remained hopeful the airline could avert bankruptcy and resume talks with Air France-KLM, which abandoned negotiations with unions on Wednesday after rejecting their demands aimed at saving more jobs.

The eight unions in a joint news conference said they were willing to enter talks with anyone, including Air France-KLM, to save Alitalia, which summoned unions for a meeting on Friday.

"Air France-KLM did not have an attitude of complete closure," said Filt-Cgil union's Fabrizio Solari, adding the unions were ready for sacrifices to keep Alitalia flying.

"Alitalia in chaos," read the headline in Italy's top newspaper Corriere della Sera, while La Repubblica's editorial called it "Flagship Suicide".

Alitalia, which loses over one million euros a day, has enough funds to last until the end of June, La Repubblica calculated. The airline has said it needs a 750 million euro cash injection by mid-year to keep flying.

One union official said summer bookings by tour operators on Alitalia had dropped 50 percent from last year. Alitalia's international bookings have also fallen 40 percent over the past month, Ansa news agency said, citing market sources. Alitalia's shares were suspended yesterday after closing down to 0.50 euros on Wednesday, giving it a market value of around $1.15 billion. Air France-KLM shares were up three percent.

The Italian airline's main appeal is its lucrative shuttle route from Rome to the country's financial capital, Milan.

Media magnate and opposition leader Silvio Berlusconi, tipped to become Italy's next prime minister, renewed his appeal to Italian businessmen to come forward and save Alitalia.

Some newspapers looked to a possible return to the bidding of domestic airline Air One, which was snubbed by the government in favour of Air France-KLM, or even German airline Lufthansa, which pulled out of last year's aborted auction.

But Lufthansa denied any plans to bid for Alitalia, though it said Italy remained an attractive market for it.

"With the global credit crisis, it is uncertain whether any investor can finance Alitalia's takeover and restructuring through debt." said Diogenis Papiomytis, a Frost & Sullivan aviation consultant. "The future for Alitalia is uncertain and it could be argued that the only option now is bankruptcy."