Alitalia faces a EUR1.25 billion euros (USD$1.86 billion) damages claim over plans to reduce flights at Milan's Malpensa Airport as the state airline struggles to keep its sale to Air France-KLM on track despite a rival's legal challenge.

Italy's outgoing government has called a crisis meeting next week on the future of the Milan airport, whose operator SEA said it would seek EUR1.25 billion in damages because Alitalia would no longer be using it as a hub.

Alitalia, which says it needs more than USD$1 billion this year to keep flying solo, started eight weeks of takeover talks with Air France-KLM on January 15.

But the collapse of Italy's government last week and a legal challenge to the exclusive discussions by snubbed domestic rival Air One have cast uncertainty over the airline's sale.

Air One, backed by Italy's largest retail bank Intesa Sanpaolo, has gone to court to try to annul the decision to talk to Air France-KLM, which had the blessing of the outgoing government.

But now politicians are trying to form a new administration that would focus on voting reform before a general election, putting the airline sale talks in doubt.

Alitalia's planned flight cuts have irked politicians whose constituencies in the industrial north and Milan, the country's financial and fashion capital, are served by Malpensa.

"This is how you kill Malpensa," said Roberto Formigoni, governor of the Lombardy region which includes the airport.

SEA Chairman Giuseppe Bonomi told a press conference Alitalia would cut flights by 70 percent to just 105 a day. Malpensa currently handles around 750 flights a day in total.

"The damages... are EUR1.25 billion," Bonomi said, outstripping Alitalia's market value of around EUR900 million and its EUR1.2 billion of debt.

Italy's outgoing government, under Romano Prodi, called an emergency meeting on Malpensa's future for next week.

"We confirmed the decision to call the Milan round table to discuss Malpensa as soon as possible, next week for sure," Equal Opportunities Minister Barbara Pollastrini said on Friday, after a cabinet meeting under Romano Prodi, who quit last week.

The finance ministry -- which controls the state's 49.9 percent stake in Alitalia -- said it approved of the airline giving up the slots.

The move was included in Alitalia's "survival plan", announced last year before it entered talks with Air France-KLM and the Franco-Dutch carrier backed the plan.

Its proposal for Alitalia includes an all-shares offer valuing its target around EUR485 million or 35 euro cents per share. Alitalia shares closed up 1.3 percent at a little more than 66 euro cents.

Postponing the cuts would be "incompatible with the delicate situation the company is in and with the exclusive talks with Air France-KLM", the finance ministry said. "Moreover, it would expose Alitalia to legal actions by other airlines interested in the slots."