BA says in merger talks with Iberia

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The flagship carrier said in a statement the discussions had the support of both companies, although it expected it would take several months before terms could be agreed.

BA's shares were up 7.4 percent at 251.5 pence by 12:02 p.m., valuing the company at 2.9 billion pounds. Iberia, the smaller carrier worth about 1.5 billion euros (1.9 billion pounds), had its shares suspended until 12:30 p.m.

BA's chief executive, Willie Walsh, said the move made sense in current market conditions.

"The aviation landscape is changing and airline consolidation is long overdue," he said in a statement.

"The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment," he added.

"Over the medium term they should reap significant rewards in terms of both synergies ... and also in terms of maximising revenues," NCB analyst Neil Glynn said.

BA has been a shareholder of Iberia for nearly 10 years and currently owns 13.15 percent of the Spanish carrier, while Iberia has taken a 2.99 percent direct stake in BA, on top of exposure to a further 6.99 percent through contracts for differences linked to the BA share price.

BA said both parties were confident of securing regulatory approval, adding that the European Union had already allowed the duo to cooperate widely.

Iberia's 23 percent shareholder Caja Madrid declined to comment.

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