Lufthansa calls on EU to block possible Etihad-Alitalia tie-up

* Lufthansa says Europe airline industry better privatised

* Etihad in due diligence on possible Alitalia investment

* Italian transport minister rebuffs criticism

FRANKFURT, Feb 3 (Reuters) - Germany's largest airline Lufthansa has called on European regulators to block plans by Abu Dhabi's state-owned Etihad Airways to invest in ailing Italian carrier Alitalia, saying it would amount to unfair competition.

Etihad, which has bought stakes in airlines across the world including Air Berlin (Berlin: AB1.BE - news) , Aer Lingus (Other OTC: AELGF - news) and Virgin Australia, said on Sunday it was in the final stages of a process that could see it invest in Alitalia.

Lufthansa has fiercely lobbied against state-owned Gulf airlines such as Etihad, Emirates, and Qatar Airways, and their fast-paced expansion in Europe, and has said in the past they benefit from unfair state aid.

The German airline said on Monday that Europe would do better to keep its airline industry mostly privatised.

"We reject recurrent subsidies and the partial renationalisation of European airlines, whether by European states or by states or state-owned companies from outside the European Union," it said.

Alitalia is seeking a partner to help keep it flying and a government-backed plan to raise emergency cash already came under fire from International Airlines Group, the owner of British Airways and Iberia, in October.

Italian transport minister Maurizio Lupi brushed off Lufthansa's criticism.

"Lufthansa's worries about a deal with Etihad just confirm that Alitalia is on the right track," Lupi said in a statement. "State aid? Flouting of competition rules? It rather seems that Lufthansa is the one that is afraid of competition."

Alitalia also said on Monday it was about to finalise loan agreements with banks for up to 200 million euros ($270 million) pledged last year as part of the government-brokered rescue.

Lufthansa added that Europe's policy makers should stop burdening the region's own airlines with measures such as emissions trading, passenger taxes and night flight bans and focus on ensuring a fair global framework.

"We are doing our bit by undergoing painful cost-cutting measures, but we need fair competition," said the airline, in the midst of a restructuring programme to cut costs and boost profits.

The European Commission, which is already looking at whether an investment by the state-owned Italian postal service in Alitalia contravenes its state aid rules, did not immediately respond to requests for comment.

International Airlines Group declined to comment on Monday.