Shares in British Airways (BA) have risen sharply as investors welcomed news of an outline agreement for the airline to merge with Iberia, the Spanish carrier.

The two loss-making groups reached a preliminary agreement late on Thursday on a $6.6bn merger to create one of the  world's biggest airlines after months of negotiations.

The new airline, which would see BA hold 55 per cent of the company and Iberia take 45 per cent, would have 419 aircraft and fly to 205 destinations

The share price of BA rallied 4.18 per cent in early trading on Friday, having already jumped 7.5 per cent the previous day in anticipation of the deal.

EU approval

The two carriers aim to complete the merger by the end of the year but the deal will require approval by the European Commission.

Stephen Furlong, an analyst at Davy stockbrokers, said: "The companies cited the highly complementary network fit worldwide, combining BA's strong presence in North America, Asia-Pacific and Africa with Iberia's strong Latin American presence.

"In addition, there is greater potential for future growth by optimising the dual hubs of London and Madrid."

British newspapers warned on Friday of job losses at both airlines after the two companies announced they hoped to save $590m a year through the merger.

The deal will create Europe's second biggest airline by stock market capitalisation, and third biggest by income, with around 60 million passengers per year.

BA and Iberia had announced in July 2008 that they were in talks for an all-share merger but discussions broke down in differences over the balance of control and the size of BA's growing pension-fund deficit.

Iberia retains the right to back out of the merger deal if the pension deficit issue is not resolved.