Alitalia SpA said TPG has been unable to form a consortium with a majority of Italian investors but the private equity firm will continue to look for other opportunities in the airline's privatisation.
The Italian government is seeking to privatise the loss-making airline in which it has a 49.9 pct stake.
Aeroflot, Air France-KLM, Deutsche Lufthansa AG, AP Holding, which owns the Italian airline Air One, and a group of local investors led by lawyer Antonio Baldassarre have also expressed interest in Alitalia.
Alitalia is reportedly encouraging foreign and Italian investors to form alliances that will keep the airline in Italian hands to avoid losing routes obtained through bilateral agreements.
The daily La Stampa said AP Holding is rumoured to have dropped out of the race and Luftansa and Air France are the only likely contenders.
La Stampa said Air France, which has a cross-shareholding with Alitalia and a commercial alliance, is the front-runner and that Italian Prime Minister Romano Prodi has been trying to reach an agreement with the group for over a year.