A statement said Etihad, which already held a 2.99 percent stake in the cash-strapped Air Berlin, would extend $255 million (€195 million) in credit lines over the next five years.
"Etihad Airways minority stake will consist of 27.03 percent from a new share issue by Air Berlin, funded from operational cash flow, and an existing interest of 2.99 percent (pre-dilution), which will amount to a total interest of 29.21 percent," the statement said.
The new shares will be issued at €2.31 and the acquisition will cost around €53 million, according to a calculation done by news agency AFP.
Air Berlin is trying to trim losses after growing rapidly over the last few years and piling up debt as it ordered dozens of planes.
The move will enable the carriers to have a combined network of 239 destinations, the statement said.
"Etihad Airways and the Air Berlin group carry a combined total of more than 40 million passengers a year, operate 233 aircraft, and employ 18,000 people. Together, the companies generate more than $9 billion in revenues," the statement said.
"We estimate each airline could achieve incremental revenues of between €35 million and €40 million just in the first year, and we believe the partnership has enormous potential to unlock a range of efficiencies."
Etihad chief executive officer James Hogan said the deal was one of the most important in the history of the UAE's national airline.
"This new partnership expands our network reach, gives us access to 33 million new passengers, and provides us with a real opportunity for global growth," he said.
"Through Air Berlin, we gain immediate access to a broad and complementary European market, with outstanding connectivity options for customers of both airlines."