Air France-KLM Group, Europe’s biggest airline, revived takeover talks with Alitalia SpA, the third major carrier to announce buyout negotiations in eight days.

Shares of Air France had their biggest decline in more than to years. Alitalia has a market value of $1.67 billion and hasn’t reported a profit since 2002. Air France said exploratory discussions won’t progress until the Italian airline gains government help to reduce costs.

“In today’s reality, a merger would be a very bad idea,” an analyst at Oddo in Paris with an add rating on Air France shares, Yan Derocles, said. “Without extra help from the Italian government, Alitalia would increase Air France-KLM’s costs. It has union problems, market share problems and must upgrade its fleet.”

Chief Executive Officer Jean-Cyril Spinetta, who led Air France’s purchase of KLM in 2004, would gain hubs in Milan and Rome through an acquisition of state-controlled Alitalia. Airline mergers are gathering pace after US Airways Group Inc. bid last week for Delta Air Lines Inc. Qantas Airways Ltd., Australia’s biggest airline, yesterday received an approach from Macquarie Bank Ltd. and Texas Pacific Group.

Shares of Air France dropped 2.11 euros, or 6.5%, to 30.13 euros in Paris. The stock is up 67% this year. Alitalia fell 1 cent, or 1.5%, to 93 cents. Earlier the Italian carrier rose as much as 5.4%.

Investors were also disappointed that Air France didn’t today increase its full-year earnings forecast after second-quarter profit, excluding a yearearlier gain on an asset sale, rose 26%.

“After the recent sharp rise in the share price, one might have anticipated some improvement in the guidance for the full year,” an analyst at JP Morgan in London with a neutral rating on Air France shares, Christopher Avery, said. “The market is a little disappointed with its absence.”

Alitalia CEO Giancarlo Cimoli told Italy’s parliament last month that without government action the airline’s losses will grow. The company has been buffeted by higher costs from fuel and personnel, even as revenue from flights increased.

“This development, aimed at finding satisfactory answers to some strategic issues, is still at an early stage and not exclusive,” Alitalia said in a statement.

The disclosures by both airlines came one day ahead of a meeting between French President Jacques Chirac and Italian Prime Minister Romano Prodi. Prodi today was quoted by French newspaper Le Figaro as saying he still had many doubts about Alitalia getting bought up by Air France.

The Italian government may hold a hold a cabinet meeting to decide whether to push ahead and cut its stake in the state-controlled Alitalia to make it more suitable for takeovers.

“There is urgency to intervene where Alitalia is concerned, there will be developments shortly,” the Industry Minister Pierluigi Bersani told reporters in Brussels, without giving further details.

Mr. Spinetta, 63, declined at a press conference in Paris today to give a detailed outlook for the year. He said he’s comfortable with analysts’ consensus estimates for the year.