The Government would not stop British Airways becoming a Spanish company as a result of a merger with Iberia, the Transport Secretary said yesterday.

BA and Iberia, the Spanish flag carrier, are believed to be near to agreeing merger terms in talks that have been continuing since July.

It is thought likely that the airlines would continue to operate as separate brands under a new operating company after the merger. However, it is not clear whether this parent company would be based in Spain or in Britain.

Geoff Hoon, the Transport Secretary, said yesterday: “We would be completely at ease if the companies took this decision [to base in Spain].”

The loss of a prominent company such as BA could be controversial in the UK but it is not thought to have been a significant problem in the negotiations between the carriers. Willie Walsh, the chief executive of BA, said two weeks ago that the only remaining area of concern was the financial control of the parent company.

However, Mr Hoon warned the Spanish Government not to interfere in the negotiations. He said: “Using Heathrow and Madrid as a double hub with combined operations is a strategic advantage for the future and can be tremendously successful. But - and this is crucial in Britain - they are private companies. At one time, it was governments which decided what was the best thing to do. Frankly, I don't think that governments would be very good at making these types of decisions.”

Although details of the merger have not been made public, it is expected that the new company will retain listings in London and Madrid. Mr Walsh is likely to remain chief executive and Fernando Conte, the chairman of Iberia, would become chairman of both airlines. Another potential sticking point is the share that each company's investors would have in the new entity. Reports in Spain have indicated that BA shareholders may hold only 55 per cent of the new company, down from the near-70 per cent when the proposed merger was announced.

BA and Iberia are seeking a merger to improve their financial strength amid a severe downturn in the aviation sector. The decline hit Airbus, the aircraft manufacturer, yesterday as it announced plans to shed 250 contract workers at a wing factory in Broughton, North Wales.

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