* Aegean to pay 72 mln euros for Olympic Air
* Both brand names will be kept
* Deal subject to approval by competition authorities
* Deal to result in synergies and reduced costs (Updates with Aegean confirming deal, rationale)
By George Georgiopoulos
ATHENS, Oct 22 (Reuters) - Greece's Aegean Airlines is making a fresh attempt to buy Olympic Air, this time for an agreed 72 million euros, in a bid to generate savings to cope with the country's deep recession and create a stronger domestic competitor to foreign rivals.
The European Commission in 2011 blocked a previous attempt by the two airlines to merge on the grounds the combined company would dominate the domestic air market. However, both firms have since seen their market shares shrink and made losses last year.
Greece's economy is in its fifth year of recession as it drives through austerity measures to deal with a debt crisis that led to an international bailout. The country's banks are also consolidating in an effort to cope with the downturn.
Aegean said on Monday it had agreed to buy Olympic, which was founded in 1957 by the late shipping magnate Aristotle Onassis, from Marfin Investment Group (MIG).
Greece's tourism industry accounts for around one in five jobs in the country and is crucial to its economic recovery.
"Our subscale size, combined with the effects of the unprecedented Greek crisis, restrict our ability to successfully compete within the European and global aviation market," Aegean's Chairman Theodore Vassilakis said in a statement.
"As a result, we are faced with the immediate danger of Greek tourism, essential for the country's recovery, becoming entirely dependent on foreign carriers," he said.
Aegean, with a market value of about 121 million euros, expects to make savings from the deal via improved buying power and the elimination of duplicate systems.
Its shares ended 2.9 percent higher in light volume.
Olympic Air will become a subsidiary of Aegean and the brand names and logos of the two companies will be maintained and each will have distinct aircraft and flight staff, Aegean said.
Payment will be made in instalments and the deal is subject to approval from competition authorities.
Sources close to the two airlines had told Reuters earlier on Monday that Aegean was in advanced talks to buy Olympic.
Olympic fell into steady decline after being operated for many decades by the Greek government and burdened the state budget with losses.
Aegean offered 170 million euros to buy the debt-ridden Olympic when it was privatised in 2009, but lost out to MIG.
During their failed merger attempt in 2010-11, Aegean and Olympic offered to cede take-off and landing slots in Greece, but the European Commission ruled this was not enough as Greek airports did not suffer from the levels of congestion affecting others in Europe.
Olympic and Aegean rejected suggestions of giving up part of their fleet or one of their two brand names to new entrants.
Aegean has a young fleet of 29 Airbus aircraft and flies more international routes than Olympic, which has a fleet of 21 planes.
Aegean flies to 51 foreign destinations while Olympic only services seven routes abroad. Olympic flies more domestic routes.
Aegean had sales of 668 million euros last year, almost three times the revenues of Olympic. It ended the year with a net loss of 27.2 million euros. Olympic lost 37.6 million euros in 2011.
($1 = 0.7674 euro) (Editing by Helen Massy-Beresford and Mark Potter)