(BRUSSELS) - The European Commission launched on Wednesday an illegal state aid probe into a 300-million-euro (465-million-dollar) government loan to ailing Italian airline Alitalia.

The European Union's top competition watchdog warned that "at this stage" it believed that the loan, which Alitalia has the option of converting into equity capital, was "incompatible" with EU state aid rules.

The commission said that because Alitalia had in the past benefited from state bailouts, Italy could not "in principle" grant it any more aid, despite the cash-strapped company's increasingly perilous situation.

Spokesman Mark English said that the commission had up to a maximum 18 months to carry out its investigation and that in the meantime Alitalia could use the funding.

The commission said its probe into the loan would focus on whether it was made on the same terms of a private investor and would allow all interested parties to voice their opinion.

Rival airlines such as Iberia and British Airways have condemned the loan and Air France-KLM chairman Jean-Cyril Spinetta has said the Italian carrier needed an "exorcist" to save it from bankruptcy.

The future of the airline has been in doubt since Air France-KLM pulled its offer off the table, with Silvio Berlusconi, elected prime minister in April, promising an Italian solution to its problems.

With the airline bleeding cash, the previous government granted the loan in April in order to avert bankruptcy.

But as losses continued to pile up, Berlusconi's government passed a decree that would allow Alitalia to shore up its dwindling equity capital, which was vital to avoid bankruptcy.

"The commission considers, at this stage, that this measure in favour of Alitalia could constitute state aid that is incompatible with (EU) rules in force and could therefore give the company an unjustified advantage over its competitors," it said in a statement.

The government, which has a 49.9 percent stake in the airline, is trying to find a buyer.

Text and Picture Copyright 2008 AFP. All other Copyright 2008 EUbusiness Ltd. All rights reserved. This material is intended solely for personal use. Any other reproduction, publication or redistribution of this material without the written agreement of the copyright owner is strictly forbidden and any breach of copyright will be considered actionable.