Qantas Airways and British Airways are in talks about a potential merger as airlines explore consolidation in a bid to navigate the economic downturn.
The Australian airline confirmed on Wednesday it was exploring a potential merger via a dual-listed company structure after a similar announcement earlier by BA that sent the British company's shares soaring in London trade.
In a short statement, BA also said its tie-up talks with Spanish airline Iberia were continuing.
"In response to recent media speculation, British Airways Plc confirms that it is exploring a potential merger with Qantas Airways Limited via a dual-listed company structure," the statement said.
A Qantas statement released in Sydney echoed BA's assertion that there was no guarantee any transaction would be forthcoming and a further announcement would be made in due course, if appropriate.
Qantas said any transaction would comply with its obligations under the Qantas Sale Act - which stipulates the company must be 51% Australian-owned, keep its headquarters in Australia, and have an Australian chairman.
BA and Iberia announced in July they were holding merger talks to create the world's third-largest airline in terms of income.
British Airways, Iberia and American Airlines signed an agreement in August to cooperate on flights between North America and Europe.
Virgin Atlantic Airways, which has already objected to the BA-American-Iberia tie-up, said BA was attempting to increase its dominance to the detriment of competition.
BA and Qantas are already code-sharing partners in the oneworld global alliance, which brings together 10 of the world's carriers.
News of their merger talks came a day after the Australian government revealed plans to increase the level of foreign ownership allowed in Qantas, but it will not permit a takeover.
Australian law currently limits a single foreign holding to 25%, while a group of foreign holdings can total 35%.
A federal government policy paper released on Monday proposes lifting the foreign ownership limit - whether by one company or a group of companies - to 49%.
That would allow Qantas and BA to swap equal stakes in each other.