(Updates throughout, adds Alitalia reference)
By Noah Barkin and Brian Love
PARIS, July 29 (Reuters) - France's centre-right government set its ambitious privatisation programme rolling on Monday with an announcement that it planned to sell off a large chunk of Air France and cut the state's stake to below 20 percent.
The sale, which could raise more than a billion euros ($980 million) for a cash-hungry government at current stock market prices, marked a change of French style by a new government with few qualms about giving up control of a national flagship company born in 1933.
Air France was nationalised in 1945 and remains under state control after a partial sale by the former left-wing government that cut the state's stake to 54.4 percent.
"The basis we are working on is that we go to just below 20 percent," a spokesman at the Finance Ministry told Reuters, adding that the government hoped to have the terms of the sale ready by the end of the year.
"We're sending the signal that Air France will be on the privatisation starting line."
Finance Minister Francis Mer issued a statement saying that the state would remain a major shareholder and that legislation would be prepared to ensure Air France's traffic rights -- in principle airport take-off and landing slots, and routes.
The company was the first of a long list of asset sales that Prime Minister Jean-Pierre Raffarin has said will take place to reduce the state's role in the economy where it is not needed.
ONE OF EUROPE'S TOP AIRLINES
With a successful hub at Charles de Gaulle airport north of Paris and a strong alliance with U.S.-based Delta Air Lines Inc. , the carrier where labour strikes were once legion has emerged as one of the top airlines in Europe in recent years.
Some investors have been reluctant despite those successes to buy Air France shares because of liquidity concerns linked to the state's majority stake and worries that the government might still be exerting an influence on management.
Analysts said those concerns would be substantially allayed if the state held less than a fifth of the airline's capital.
"This would be enough of a reduction to make the operation worthwhile," Jonathan Wober at Deutsche Bank in London said. "Liquidity has been one of the biggest problems with the stock from an investor point of view."
The left-wing government that lost power in June elections privatised heavily but frequently held on to controlling stakes and many investors remained wary of its hand in management.
Air France said the sale would allow it to compete better internationally and position it for future consolidation.
The ministry cited several prerequisites. Management would have to consult employees and legislation would have to be put to parliament on traffic rights.
Clearly mindful of recent turmoil in global stock markets, it said the precise timing of the sale would depend on market conditions.
Despite plans for close co-operation with Alitalia, finance ministry officials said there were no plans to sell part of the capital in Air France to the cash-strapped Italian carrier.
It made clear it saw the sale as vital to development.
"To allow the company to accelerate the modernisation of its fleet, to consolidate its alliances and strike partnerships, the state must give it more freedom," the ministry statement said.
Based on the current share price of 13.69 euros, the sale of some 35 percent of the carrier would raise roughly 1.1 billion euros for the government.
Raffarin and his finance minister hope to sell off up to 40 billion euros in state assets and have said this will include stake sales in politically sensitive firms like state energy giant Electricite de France (EdF).
Already under pressure from its European neighbours for its soaring public deficit, France badly needs money.
Raffarin has promised despite the deficit pressures to make good on President Jacques Chirac's pledges of big tax cuts and more spending on police and defence, and to tackle a big problem in future years, that of funding of pensions for an ageing population.
Earlier this month, Mer asked banks to submit proposals on the sale of shares in 13 firms in which the state holds stakes.
In addition to Air France and EdF, those companies are Gaz de France, EADS , Credit Lyonnais , ASF , CNP , Thales ,, Thomson Multimedia , Dassault Systemes , Bull and France Telecom .
Mer has also said the state could move fast to privatise state-owned aero-engines maker Snecma [SNEC.UL] -- an operation which was delayed by the previous leftist government after the September 11 attacks in the United States.
Airlines were also hit hard by the attacks, but Air France has emerged from the crisis looking better than many rivals.
It has benefitted from the collapse of carriers like Sabena and SwissAir and shifted capacity to regions where the traffic slump has been less brutal, such as Africa and the Indian Ocean.
The firm's shares have fallen 15.8 percent this year, but are up 57 percent from their post-September 11 low of 8.7 euros, trading at 13.69 on Monday on the Paris bourse. (Additional reporting by Catherine Bremer)