General Electric Co has agreed to buy the aviation business of Italy's Avio for $4.3 billion, in a sign of confidence about the country's underlying strength despite its deep recession.

The deal comes as Europe's fourth-biggest economy labors to become more competitive under a reform agenda set by technocrat Prime Minister Mario Monti, who is due to step down on Friday before general elections seen in February.

"We are convinced that Italy will exit the crisis," Nani Beccalli, president and chief executive of GE Europe, told reporters on Friday. "There are undoubtedly hurdles linked to red tape. But the strategic value of the deal is so big (it would offset other issues)", Beccalli said.

The purchase, from Avio's owners private equity fund Cinven and Italian state-controlled defense group Finmeccanica , frustrated the aspirations to take over Avio of France's Safran and Italy's state-backed Strategic Fund.

GE, whose businesses range from infrastructure technology to financial services, said Avio would boost its global supply chain capabilities as its engine production rates rise to meet growing customer demand.

Avio, which makes components for the GE Dreamliner engine used by Boeing Co , ranks among Italy's industrial jewels and is one of the most technologically advanced companies in its field.

STRATEGIC ASSET

GE said the purchase price values the aviation business of Avio, which supplies engine parts for the Eurofighter Typhoon and to engine makers GE and Rolls Royce Holdings , at 8.5 times its expected 2012 core earnings before interest, taxes, depreciation and amortization.

Debt-laden Finmeccanica, which owned 14 pct of Avio, will use the 260 million euros it is earning from its stake sale to lower debt. The sale is the first of a number of disposals the company needs to carry out to keep its investment-grade credit rating.

The U.S. group will not be buying Avio's space unit, which the Italian government considers strategic. The unit, which is expected to make sales of between 280 million euros and 285 million in 2012, will remain for the time being under the control of Cinven and Finmeccanica.

Avio's revenue in the aviation sector was 1.7 billion euros in 2011, with more than 50 percent derived from components for GE and GE joint venture engines.

Cinven had bought Avio in 2006 for some 2.6 billion euros.

Under GE's ownership, Avio will invest 1.1 billion euros over the next 10 years, company executives said.

The GE deal comes after a planned initial public offering for Avio was scrapped earlier in 2012 because of weak market conditions.

(Additional reporting by Krishna Das and Massimo Gaia; Writing by Lisa Jucca; Editing by David Holmes)