Tension between Iberia and British Airways, its potential merger partner, was growing last night after it emerged that the Spanish flag-carrier had been briefing hedge funds against BA’s prospects. One City source said that Iberia had been “pumping the investment community full of nonsense”.

GLG Partners and TT International are understood to have been among the funds invited to Madrid. This week BA suddenly announced that it was also in merger talks with Qantas, the Australian flag-carrier. Fernando Conte, Iberia’s chief executive, effectively told Willie Walsh, BA’s chief executive: “It’s them or us.”

Mr Conte said that he had been informed of the Qantas talks only an hour before the announcement. A source close to the discussions said: “Of course Iberia are unhappy about it. Nobody wants to see their date go off with someone else.”

Sources familiar with the hedge fund discussions have said that Iberia highlighted BA’s £1.74 billion pension fund deficit and increased competition from the Open Skies agreement as weaknesses in its merger partner. The briefings by Iberia have been interpreted as an attempt to push BA’s share price down.

GLG said its policy was not to comment on company meetings it had during the normal course of business. Iberia and TT declined to comment but a source close to BA said he was surprised the Spanish carrier would try to brief against its proposed partner.

BA and Iberia announced in August that they were in talks to merge, but Iberia’s concern over the size of BA’s pension deficit slowed the process, with Caja Madrid, Iberia’s largest shareholder, saying that the Spanish should get a larger share of the combined company as a result.

Based on present valuations, BA shareholders would get only about 55 per cent of the enlarged company, down from about 70 per cent earlier this year. BA shareholders are thought to be pushing for at least 60 per cent, while Iberia’s shareholders are said to want a 50-50 deal. Iberia has a 9.9 per cent stake in BA; BA holds a 13.2 per cent stake in the Spanish carrier.

The announcement this week that BA is in merger talks with Qantas complicated the issue further. Analysts have said that they believe the Qantas talks, which are at a very early stage, may force Iberia to drop its objections and negotiate merger terms with BA.

BA has said it that could merge with Qantas and Iberia as well as extend its alliance with American Airlines. However, a senior aviation executive argued that the potential benefits of a Qantas deal were much less than an Iberia deal because of the distance between Europe and Australia.

BA and Qantas already cooperate on the “kangaroo route” between London and Sydney, which further limits the potential for cost-cutting benefits. “BA-Qantas is not going to happen,” the executive said.

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