BRUSSELS/FRANKFURT - Germany's Lufthansa LHAG.DE won EU antitrust approval to buy 41% of Italy's ITA Airways for 325 million euros ($350 million) on Wednesday after ceding routes and slots.

The deal will boost Lufthansa's presence in the lucrative southern European market and is one of three high-profile sector transactions in Europe, underscoring efforts by its airlines to boost scale to offset rising operating costs.

ITA also offers key long-haul routes to Lufthansa, which has an option to take full ownership if the Italian airline's financial performance improves.

Lufthansa and ITA agreed to cede Italian short-haul routes to one or two rivals, the European Commission said, confirming a Reuters report. The German airline has said it is in talks with Easyjet EZJ.L and Spanish low-cost carrier Volotea.

The combined group will also undertake interlining agreements or slot swaps for long-haul routes to increase frequencies and improve connections for one-stop flights, it added. Interlining agreements allow individual airlines to handle passengers travelling on itineraries that require multiple flights on multiple carriers.

Lufthansa and ITA will also transfer some of the state-owned airline's slots for short-haul routes at Milan's Linate airport to competitors, allowing them to set up a sustainable base.

"The package of remedies proposed by Lufthansa and the MEF (Italy's ministry of economy) on this cross-border deal fully addresses our competition concerns by ensuring that a sufficient level of competitive pressure remains on all relevant routes," EU antitrust chief Margrethe Vestager said in a statement.

Lufthansa can only close the deal once rivals, approved by the EU antitrust watchdog, start operating the routes. EU regulators had been frustrated with its previous approved deals during which rivals declined to take up routes and slots because they said they could not compete with Lufthansa.

Lufthansa has faced rising labour costs tied to strikes earlier this year, causing it to issue a profit warning.

Analysts say it will not be easy to turn around ITA, whose predecessor Alitalia faced decades of financial struggles and bailouts. Lufthansa will likely need to make a significant investment to rebuild ITA.

Regulators in Europe also worry the region's three largest airline groups - IAG ICAG.L, Air France KLM AIRF.PA and Lufthansa - are becoming too dominant, potentially hurting consumer choice and making flying less affordable.

The Commission is currently examining British Airways-owner IAG's bid to buy Air Europa. It is also set to evaluate Air France-KLM's offer to take a 19.9% stake in Scandinavia's SAS.

IAG said it was glad that the Commission recognised the benefits of airline consolidation.

($1 = 0.9295 euros)

(Reporting by Foo Yun Chee; Editing by Alexander Smith)