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Lufthansa's ITA deal faces EU veto unless stronger remedies offered, sources say

By Foo Yun Chee, Ilona Wissenbach and Angelo Amante

BRUSSELS/FRANKFURT/ROME (Reuters) - Lufthansa's bid to buy a stake in Italian peer ITA is set to be blocked by EU antitrust regulators unless there is a substantial improvement to remedies to address competition concerns, people with direct knowledge of the matter said on Thursday.

Remedies offered last week are insufficient to allay the European Commission's concerns that the deal may reduce competition in short-haul and long-haul routes connecting Italy to other countries and also reinforce ITA's market power at Milan Linate airport, the people said.

There is still time for Lufthansa to offer more remedies, they said, ahead of the commission's July 4 decision.

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The EU competition watchdog and Lufthansa declined to comment. The deal, and British Airways-owner IAG's proposed buyout of Air Europa, underscore the current consolidation in the European airline industry.

Rome is sticking to its plan to sell a 41% stake in state-owned ITA, Alitalia's successor, to Lufthansa and is not considering other options as the EU investigation into the deal is still ongoing, a senior Italian government official told Reuters earlier this week.

Lufthansa last week offered to keep some competing ITA short-haul routes in an effort to secure EU antitrust approval for the deal, other people with direct knowledge of the matter said.

The offer on short-haul routes concerns Germany, Belgium, Switzerland and Austria, the sources said.

The German airline is also prepared to accept interlining agreements with rivals, the people said. Such deals allow individual airlines to handle passengers travelling on itineraries that require multiple flights on multiple carriers.

To address EU concerns on long-haul routes, the carrier said it would not integrate ITA into its joint venture with United Airlines and Air Canada, the sources said, adding ITA would operate independently for two years.

Lufthansa also offered to give away 40 Milan Linate airport slots to easyJet and Volotea, they said.

The European Commission, which is scheduled to decide on the deal by July 4, is seeking feedback from rivals, consumer and travel organisations and pilot groups. They have until May 19 to respond.

(Reporting by Foo Yun Chee, additional reporting by Giuseppe Fonte in Rome; Editing by David Goodman and Chris Reese)