The Guardian Media Group (GMG) is considering closing The Observer, the world’s oldest Sunday newspaper, as part of a cost-cutting drive triggered by a drastic plunge in the group’s finances.

Members of the Scott Trust, the charitable foundation that owns GMG, discussed the plan on July 6. They were shown trial copies of an Observer-branded news magazine that would replace the paper and be published on a Thursday.

After opposition from some trust members, thought to include Larry Elliott, who represents journalists of both papers on the board, GMG executives agreed to put the scheme on hold while an alternative was worked out.

This would keep The Observer as a Sunday newspaper but heavily slimmed down. Insiders now expect a decision at a trust meeting next month.

GMG declined to comment, as did members of the Scott Trust approached by The Sunday Times, including Dame Liz Forgan, its chairwoman.

Sources at The Observer said that rumours about the newspaper’s future had circulated for several weeks, as had stories of disagreements at the Scott Trust over the plan. “At the moment, I would say it is 50:50 whether we are headed for the magazine, or for job losses and cost-cuts but keeping the paper,” said one senior source.

Closure of The Observer would bring an end to a 218-year publishing era. It was set up in 1791 by WS Bourne, and its editors have included David Astor and Donald Trelford. It reached a peak circulation of 1.3m copies in 1979, but now hovers at about 400,000 a week.

Although GMG does not disclose the results of individual newspapers, The Observer is thought to have lost £10m- £20m a year in recent years, and not to have made a profit since it was bought by The Guardian in 1993.

To cut costs in recent months it has reduced its bulk sales — copies sold at a steep discount to airlines and hotels — and trimmed the size of its sections, including ditching its stand-alone television guide.

The plans reflect the financial pain at GMG, which last week reported a sharp slump in trading. It revealed a pre-tax loss of £89.8m, compared with a £306.4m profit last year — though that figure was boosted by a one-off profit from the sale of a share in Trader Media Group, Auto Trader’s publisher. This year’s losses were swollen by one-offs, including goodwill writedowns.

Guardian News and Media, the division that includes The Guardian and The Observer newspapers, made an operating loss of £36.8m on sales of £253.6m. Last year the loss was smaller — £26.4m.

Amelia Fawcett, GMG’s chairwoman, said the results reflected the effects of recession and longer-term structural change in the newspaper industry. “We will need to re-examine and reshape many of our existing business models if we are to continue to be successful.”

Carolyn McCall, GMG’s chief executive, said after the results she expected losses to continue this year. “Can we afford it this year? Yes. But can we afford it for the next three years? No.”

Insiders say GMG management is now studying a range of other cost-cutting plans, including redundancies. A proposal for an across-the-board pay cut has been shelved in favour of a scheme to give all staff two weeks’ extra holiday without pay.

Senior sources said the company’s unique ownership structure meant it was not clear whether The Observer’s closure would go ahead. The trust was set up in 1936 with a view to making sure the editorial independence of its titles could not be threatened by private ownership. The trust has “the core purpose of securing the financial position and editorial independence of The Guardian in perpetuity”.

The trust’s responsibilities to The Observer have been the source of friction before. In 2004, GMG commissioned consultants to look at replacing the newspaper with a magazine, only for the proposal to be fought off by members of the trust and the then editor of the paper, Roger Alton.

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