Mr. Prodi says the move is intended to give the incoming conservative government of Silvio Berlusconi time to make decisions on Alitalia. Mr. Berlusconi won general elections, earlier this month, and is expected to take over as prime minister in May.
Addressing reporters at the end of the Cabinet meeting, Mr. Prodi said Berlusconi asked him to provide a more considerable bridge loan than the one his Cabinet had foreseen, to have the time to put together and organize possible alternative solutions.
Mr. Prodi says the loan is a "short-term measure" that would have to be repaid by the airline by the end of the year.
Unions, which had opposed Air France-KLM's plan for Alitalia, welcomed the loan. The French-Dutch group announced Monday night that it no longer considered its offer to purchase the struggling Italian airline valid.
Unions and Alitalia management are now scheduled to meet, Thursday.
The airline, which is suffering from competition from low-cost carriers and is operating an outdated fleet, is losing some $1.6 million a day. Trading in Alitalia shares has been suspended on the Milan stock exchange.