BRUSSELS, May 16 (Reuters) - Lufthansa's bid to buy a stake in Italian peer ITA is set to be blocked by EU antitrust regulators unless there is a substantial improvement to remedies to address competition concerns, people with direct knowledge of the matter said on Thursday.

Remedies offered last week are insufficient to allay the European Commission's concerns that the deal may reduce competition in short-haul and long-haul routes connecting Italy to other countries and also reinforce ITA's market power at Milan Linate airport, the people said.

There is still time for Lufthansa to offer more remedies, they said, ahead of the Commission's July 4 decision.

The EU competition watchdog and Lufthansa declined to comment.

Rome is sticking to its plan to sell a 41% stake in ITA to Lufthansa and is not considering other options as the EU investigation into the deal is still ongoing, a senior Italian government official told Reuters earlier this week. (Reporting by Foo Yun Chee; Editing by Susan Fenton)