The airlines could reach an agreement on revenue sharing within a week, creating a new force dominating air travel between the hubs of southeast Britain and the United States and helping the carriers cope with skyrocketing fuel costs.

Talks between BA, American and Iberia were 'making good progress', although there was a small chance things could fall apart, the source said on Thursday.

BA head of investor relations George Stinnes confirmed the talks were ongoing, although he would not comment on the ultimate goal. The airline first said it was in unspecified discussions with American in April.

'We are talking about what makes sense to do together - what would be best and most effective,' he told reporters.

'The truth is one could find something sensible tomorrow, or could never find it. To try to put a time scale on it is unrealistic,' he added.

A deal would follow the lead of US airline alliances like the one between UAL's United Airlines and Continental Airlines.

BA shares rose 2.7 per cent to 209 pence. AMR shares closed up 4.6 per cent, or 21 cents, at US$4.83 on the New York Stock Exchange. Iberia closed unchanged at 1.37 euros.

Mr Miguel Blesa, chairman of Iberia's largest shareholder Caja Madrid, said last month Iberia and BA were in talks about an alliance, but not a merger. BA owns 13.5 per cent of the Spanish airline and attempted to acquire it last year.

American already has separate agreements with BA and Iberia, but there is as yet no venture among the three. Iberia declined to comment, American said it had already confirmed it was in talks with BA about closer cooperation but declined further comment on Thursday.

A partnership between American and BA could give the two carriers a combined market share of 50.6 per cent on routes between London and the United States. Currently, American has 14.1 per cent of that market, while BA has 36.5 per cent, according to the Official Airline Guide.

The US Justice Department would take a hard look at a deal once it was finalised, said Mr Barnard Nigro, an antitrust attorney with Willkie Farr and Gallagher.

'Given the relative positions of the airlines and some of the hubs, it seems likely that this will get a close look,' he said. 'It's hard to say what the outcome would be.'

The European Commission said it would look at the deal when the time came. 'To the best of my knowledge we have not had any approaches from these airlines so far, and the Commission's attitude would depend very much on what they were planning to do,' said commission spokesman Jonathan Todd. -- REUTERS