The deal also positions state-owned Etihad as a potential buyer of the indebted Irish government's 25 percent stake in Aer Lingus, which it is considering selling as part its international bailout.
After months of speculation about a possible deal, the airlines said on Tuesday that Etihad's stake purchase reflected "its desire to forge a commercial partnership," with Aer Lingus.
Aer Lingus said talks with Etihad, which operates 10 flights a week between Abu Dhabi and Dublin since launching the service in 2007, so far have centered around a code-share agreement and have been extended to include cost savings through joint procurement.
Aer Lingus said Etihad had told the Irish carrier that it did not intend to increase its stake pending the outcome of the talks.
Eight-year-old Etihad is attempting to gain scale quickly — particularly in Europe — as it bids to catch up to rivals such as Dubai government-owned Emirates and Qatar Airways.
In December, it raised its stake in Air Berlin to nearly 30 percent from just under 3 percent, paying approximately 73 million euros and lending the carrier $255 million.
In return, Etihad received a code-share agreement giving it access to Air Berlin's dense European short-haul route network and to the German capital ahead of Emirates, one of the fastest-growing carriers in the world, which has been lobbying for years to get into Berlin.
Etihad has already flagged its interest in the government's stake in Aer Lingus, with Chief Executive James Hogan telling an Irish newspaper in February that the group would be open to talks.
"The addition of Etihad to the carrier's equity base provides the Irish government with an additional potential bidder for its 25 percent stake when that is offered for sale," analysts at broker Bloxham said on Tuesday.
But analysts said Etihad would likely want to resolve uncertainty over whether Aer Lingus may eventually have to contribute to a pension deficit that rose to 700 million euros ($926.49 million) at the end of 2011.
"The reality is that they (Etihad) are going to want to wait to see the pension issue cleared up first before they begin to act," said Brian Devine at NCB Stockbrokers, who anticipates it to be resolved during the year.
"The state is definitely going to be involved at this stage in trying to bring the whole thing to a head," he added.
Rival airline Ryanair, which owns nearly 30 percent of Aer Lingus, warned in a separate statement that if the government sold its stake to Etihad, this could result in a break-up of the Irish airline and a potential loss of its prize slots at London's Heathrow Airport.
Aer Lingus shares were up 1.7 percent at 1015 GMT in a thinly traded market that was 0.4 percent higher.