AFP - Loss-making airlines British Airways and Iberia of Spain announced on Thursday they were holding board meetings on a merger that would create a European giant to rival Air France-KLM and Lufthansa.

"BA confirms that the British Airways and Iberia boards are holding separate meetings today, 12 November, to consider a potential transaction," BA said in a brief statement headlined 'Iberia merger talks'.

"However, no decisions have been taken and, at this time, there can be no guarantee that a transaction will be forthcoming. A further announcement will be made in due course, if appropriate."

Both airlines have suffered heavy losses because of plunging demand for air travel in the fierce global economic downturn.

Iberia said in a separate statement that the latest proposal would give BA a 55 percent stake in the merged group, while the Spanish group would hold 45 percent. Both indicated that a deal was not imminent.

A merger would create Europe's second biggest airline by stock market capitalisation, and third biggest by income.

It would also bring together BA's extensive network of flights to the United States and Iberia's large Latin America services.

The pair announced in July 2008 that they were in talks for an all-share merger. But discussions have bogged down in differences over the balance of control and the size of BA's pension-fund deficit.

Iberia financial director Enrique Dupuy de Lome said it "confirms that the terms being analysed are of a merger of equals between Iberia and BA based on a indicative exchange ratio of around 45 percent/55 percent respectively."

Thursday's news sent shares in the two companies soaring, with Iberia jumping 13.80 percent to 2.26 euros on the Madrid stock exchange in afternoon deals, when the main Ibex 35 index was up 0.79 percent.

BA shares rallied 9.75 percent to 219.5 pence on the London stock exchange, where the benchmark FTSE 100 index was up 0.58 percent.

Meanwhile, Spanish newspaper El Pais reported that Iberia had approved a merger with BA, but a spokeman for the Spanish national carrier said he could not confirm the report.

"The board of directors of Iberia has approved the merger with British Airways," the daily El Pais reported on its website, quoting sources familiar with the deal.

Under the terms of the reported deal, the financial headquarters will be in London and Iberia chairman Antonio Vazquez will also chair the new group while BA's Willie Walsh will be the chief executive officer, according to El Pais. It added that the BA board had yet to approve the deal.

However, an Iberia spokesman contacted by AFP said he could not confirm the report, saying only that a statement may be issued after the close of the stock market on Thursday.

The two airlines are seeking to merge at a time when the industry has been badly hit by a slump in passenger and cargo traffic.

BA last week announced more job cuts and posted a loss of 217 million pounds in the six months to September 30, compared with a loss of 49 million pounds during the same period of 2008.

Iberia, meanwhile, plunged into the red in the second quarter with a loss of 72.8 million euros against a 21.2-million-euro profit in the second quarter of 2008.

The Spanish carrier is scheduled to release its third-quarter earnings on Friday.

BA-Iberia would have a combined stock market capitalisation of some 4.9 billion euros.

That would make it the second largest European airline after Lufthansa, which is worth around 5.0 billion euros. Air-France KLM would be the third largest with a capitalisation of about 3.3 billion euros.