Etihad has built its holding in Virgin Australia over recent months to 4.9% and is seeking to boost the stake to 10%
Etihad Airways chief James Hogan on Friday pledged the Abu Dhabi-based carrier will never seek control of Virgin Australia and hit out at Qantas's tactics to undermine his airline.
Etihad has built its holding in Virgin over recent months to 4.9 percent and on Thursday won approval from the Australian Foreign Investment Review Board to boost the stake to 10 percent.
Virgin is Qantas's key domestic Australian competitor and last month the "Flying Kangaroo" reportedly warned the government it could "go under" if Etihad was allowed a greater stake in its rival.
Qantas executives fear Etihad, which is owned by the government of the oil-rich United Arab Emirates, could bankroll a major attack on the lucrative domestic market via Virgin.
According to The Australian, Qantas has portrayed Etihad as a plaything for oil-rich sheiks in a lobbying campaign against it.
Hogan, who is Australian, said it was a Qantas ploy to distract from its own failings.
"It is a great shame the business (Qantas) has used this as a tactic," he told the newspaper.
"The UAE has a great relationship with Australia in trade, defence and in a whole range of areas.
"In other markets, we have not seen these sorts of reactions from national carriers. To see it being used to mask their own real issues is disappointing."
Qantas had no immediate response.
The airline is struggling with soaring fuel costs and worsening global conditions and recently warned its underlying profit before tax was expected to drop from Aus$552 million (US$574 million) last year to Aus$50-100 million.
The airline, which was privatised in 1995, is primarily losing money on its international routes and believes it is being undercut by state-owned operations such as Etihad and Singapore Airlines.
Hogan said Etihad's investment in Virgin was aimed at improving co-operation on routes and networks and to create better economies of scale, similar to what it was doing with Air Berlin and Ireland's Aer Lingus.
He told the newspaper any claim that Etihad planned to take control of Virgin to challenge Qantas was ridiculous.
"What we won't do is get into a position where it means we take control of the business," he said.
"We can't run an Australian airline from Abu Dhabi, nor do we intend to."
Virgin Australia's current major shareholder is Richard Branson's Virgin Group, which has 26 percent holding.