BRUSSELS/FRANKFURT (Reuters) - Lufthansa on Wednesday won EU antitrust approval to buy 41% of Italy's ITA Airways for 325 million euros ($350 million) after ceding routes and slots in a deal that will boost its presence in the lucrative southern European market.

The deal is one of three high-profile airline transactions in Europe, underscoring airlines' bid to boost scale to offset rising operating costs.

ITA offers the German carrier more access to southern Europe, as well as to key long-haul routes. Lufthansa has an option to take full ownership if ITA's financial performance improves.

Competition regulators have demanded hefty concessions from Lufthansa to appease worries the deal could reduce competition in Italy on some short- and long-haul routes.

Regulators in Europe also worry the region's three largest airline groups - IAG, Air France KLM and Lufthansa - are becoming too dominant, potentially hurting consumer choice and making flying less affordable.

Lufthansa and Italy agreed to cede Italian short-haul routes to one or two rivals, the European Commission said, confirming a Reuters story. The German airline has said it is in talks with Easyjet and Spanish low-cost carrier Volotea.

The merged company will also do interlining agreements or slot swaps with rivals for long-haul routes to increase frequencies and improved connections for one-stop flights.

Lufthansa and Italy will also tansfer some of state-owned ITA's slots at Milan's Linate airport to address competition concerns,

Lufthansa can only close the deal once rivals start operating the routes. EU regulators had been frustrated with its previous approved deals during which rivals declined to take up routes and slots because they said they could not compete with Lufthansa.

Lufthansa has faced rising labour costs tied to strikes earlier this year, causing it to issue a profit warning before its first quarter results.

Analysts suspect it won't be easy for Lufthansa to turn around ITA, whose predecessor Alitalia faced decades of financial struggles and bailouts. Lufthansa will likely need to make a significant investment to rebuild ITA.

The Commission is currently examining British Airways-owner IAG's bid to buy Air Europa. It is also set to evaluate Air France-KLM's offer to take a 19.9% stake in Scandinavian carrier SAS.

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