Carolyn McCall, the chief executive of the company that owns The Observer, conceded yesterday that a closure of the world’s oldest Sunday newspaper was being actively considered as a solution to its mounting losses.

In a memo sent to all staff Ms McCall, who runs the Guardian Media Group, said that all options were under consideration as the company tries to cut losses that totalled just short of £90 million last year.

She said Guardian Media Group, which also owns The Guardian newspaper, was grappling with both the recession and “structural change” as advertising migrates online. Forecasting that advertising would not bounce back, she said that GMG would inevitably “be a smaller organisation”.

The nature of the proposed cutbacks was not spelt out, but she said that GMG was “examining every aspect of strategy and titles” and that “a wide variety of different options, approaches and scenarios is being developed and will be considered”.

Over the weekend it was reported that one option considered was a closure of the 218-year-old The Observer. Referring to that possibility directly, she said: “This is what has leaked, and resulted in headlines about the future of The Observer. Those of you who have worked here for a while will be familiar with intermittent coverage of this nature over the years.”

The company is in the middle of an operational review, involving Alan Rusbridger, the Editor-in-Chief for both newspapers, and John Mullholland, the Editor of The Observer, which will present its initial results in the autumn — leaving weeks of uncertainty before a decision is made.

The Observer was founded in 1791, and was acquired by Guardian Media Group from Tiny Rowland’s Lonrho in 1993. Guardian Media Group is owned by the Scott Trust, which exists to safeguard the future of The Guardian — but not The Observer — “in perpetuity”.

Ms McCall emphasised that fact in an e-mail to her staff, saying that the core purpose of the organisation she leads is “securing the long-term future of The Guardian”.

Although both titles have a left-leaning outlook, relations between The Guardian and The Observer have rarely been smooth. The Observer supported George Bush and Tony Blair’s invasion of Iraq; The Guardian did not. The Observer is frequently blamed for losses at the two newspapers, a long-standing sore point with staff of The Guardian.

It is estimated that losses at The Observer are running at £20 million out of a total operating loss of £61.2 million for The Guardian and The Observer combined. However, its defenders argue that it makes a contribution towards costs and there have been accusations of profligacy made against the The Guardian, which has been investing heavily in new media.

One option that is being considered is to replace The Observer with a news magazine, published in the middle of the week.

But, despite the confirmation of the possibility of closure, one senior journalist within the group said: “For The Guardian to close The Observer would be a truly astonishing step. I imagine it is being discussed. I cannot imagine it coming to pass.”

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