ROME (Reuters) - Abu Dhabi-based Etihad Airways is expected shortly to reach a decision on whether to take a stake in struggling airline Alitalia, Italian Transport Minister Maurizio Lupi said on Wednesday. Talks are ongoing on whether the Gulf airline, looking to deepen its network in Europe, could buy up to 40 percent of Italy's flag carrier, which has more than 800 million euros ($1.10 billion) in debt and faces growing competition. "I think (the result of talks) will come soon," Lupi told a Senate hearing. He has previously said it should be clear by March 31 whether a deal would go through. Earlier this month, Etihad Chief Executive James Hogan said the chances of a deal were "50-50" and would depend on Alitalia meeting benchmarks on costs, profitability and restructuring, as well as its network and management. A source close to the situation said that Etihad was looking to lay off 3,000 Alitalia employees, down from the 5,000 it had originally proposed, mostly in Rome's Fiumicino airport and Milan's Linate airport. Industry and banking sources said that Etihad, which has a 30 percent stake in Air Berlin , could merge the German airline with Alitalia, to create synergies and preserve Air Berlin's international traffic rights. Any deal would face challenges from Rome and Italy's unions, which in the past have fought several attempts to end the independence of the airline. ($1 = 0.7254 euros) (Reporting by Roberto Landucci; Editing by Elaine Hardcastle)