Greece's state-owned Olympic Airways faces the prospect of bankruptcy this week, when the European Commission demands that it pay back millions of euro to the national exchequer.

Greek officials fear that the Brussels authorities could ask Olympic to return up to €300 million ($303 million) in allegedly unpaid taxes and social security payments. This would be a devastating blow for the airline, which is struggling to survive.

The Greek government, which is trying to privatise Olympic, argues that the airline performs a vital role in connecting its far-flung islands and wants it to be the flag-carrier during the Athens Olympics of 2004.

The Commission is understood to have decided that favourable tax treatment amounted to illegal state aid for the airline and will demand this week that the money be repaid.

However, it will clear a €19.5 million loan to Olympic granted this year by the state-owned Commercial Bank of Greece.

As the European Union's executive body, the Commission's decision is binding, but the Greek government has indicated it will appeal to the European Court of Justice.

It adds that there has been no illegal state aid for the past three years.

Athens argues that the Commission's decisions are based on figures dating from 1994, but the Brussels authorities are understood also to have drawn their conclusions from much more recent data.

The Commission is also thought to have been angered by the lack of any audited figures from 2001, as well as qualifications by the auditors in the company's reports from 1999 and 2000.

The company says that it takes up to two years to produce figures that can be accurately audited because it lacks a centralised information system.

Mr Christos Verelis, Greece's transport minister, and Ms Loyola de Palacio, EU transport commissioner, held a stormy meeting in Athens last month.

Ms de Palacio has long made clear that she feels the European aviation sector has too many flag carriers, and that the more marginal operators should scale down their ambitions.

Last year, her department's firm line on state aid contributed to the demise of Belgium's Sabena, the first EU national carrier to go bankrupt. Brussels officials have acknowledged that Olympic could suffer a similar fate.

The Greek government has received six bids for a majority stake in Olympic and says cost-cutting efforts are yielding results. - (Financial Times Service)