Italian state distributor Istituto Luce and Australia's Palace Films have signed a two-pronged deal under which they will co-produce features and jointly distribute Italian titles in the Australian market.

The deal, which is expected to lead to the creation of a jointly owned company in the next few months, marks a return to production for Istituto Luce after a hiatus of over a year, when the company, in compliance with a government directive, focused on distribution and exhibition.

Palace CEO Antonio Zeccola said the two companies would probably co-produce three or four films a year, but that the final number would "depend on the quality of individual projects". It is understood that their first joint project could be Aussie rules football drama Deadly, Unna', which is due to start shooting in May. The Australian Film Finance Corporation (FFC), pay-TV entity the Premium Movie Partnership and the South Australian Film Corporation are also funding the project. Beyond Films is handling international sales.

Under the terms of the co-distribution deal, Palace and Istituto Luce will split p&a costs on a 50-50 basis, and will also share out any profits. As part of the deal, Palace has taken on three Italian films: Marco Tullio Giordana's foreign-language Oscar contender, The Hundred Steps, about a young man's fight against the Mafia; Silvio Soldini's sleeper hit Bread And Tulips, and The Sky Is Falling, a World War II drama starring Isabella Rossellini, which is screening in Berlin's KinderFilmFest sidebar.

In a separate Berlin deal, RAI Trade, which is handling worldwide rights to The Sky Is Falling, has also sold the film to Canada's Lions Gate.