U.S. private equity firm TPG is still interested in bidding for loss-making airline Alitalia and is waiting to see what conditions management would put on the sale, a source close to TPG said on Friday.

The source, denying a newspaper report, also said TPG's interest in Alitalia was not incompatible with its interest in acquiring Spanish airline Iberia.

TPG is leading a group of potential Iberia bidders, which also include British Airways and some Spanish firms.

Italy's government in July had to call off its seven-month auction for Alitalia -- worth about 1.2 billion euros ($1.6 billion) -- after all bidders pulled out citing restrictive conditions.

The Italian state, which is trying to shed its 49.9 percent controlling stake, has since handed responsibility for finding a buyer to Alitalia's new management.

All of the final contenders in the failed auction -- including Russian airline Aeroflot, U.S. private equity firm MatlinPatterson and smaller Italian carrier Air One -- have said they could be interested again if Italy relaxed the terms of the sale.

Alitalia said this week it had been contacted by another group of investors which expressed an interest in the carrier.

TPG in the past has told the Italian government it wants the freedom to talk to Alitalia's strike-prone unions before making a binding offer, among other changes to the sale process, people familiar with the situation have said.

Alitalia shares were down 0.2 percent in late afternoon trading, compared with a 0.2 percent rise in the overall Milan market.