A senior source in the Labour Party has described as "premature" a Bloomberg report that the Government is preparing to reject the indicative IAG bid for its 25% stake in the airline.

The source said they were not expecting the issue to arise at tomorrow's Cabinet meeting. 

The Department of Transport Tourism and Sport said in a statement that the interdepartmental steering group examining the bid for Aer Lingus will be engaging further with IAG later this week.

The news agency has been quoting an unnamed source close to the negotiations that the Government is preparing to reject IAG's indicative offer to buy its 25% stake in Aer Lingus.

The stock fell by as much as 10% in Dublin this afternoon, but came back to close around 4.5% lower at €2.12.

A final decision has yet to be taken, according to the source, who asked not to be identified because the matter isn't public.

A spokeswoman for IAG declined to comment on the status of deliberations.

Last week, IAG chief executive Willie Walsh offered assurances on maintaining Aer Lingus routes between Ireland and the UK as he sought to overcome mounting political resistance to the proposed takeover of the airline he ran until 2005.

IAG has said it will not proceed without the endorsement of the Government.

"There is a broader understanding by government politicians that the future of Aer Lingus is probably going to be in someone else's hands as part of a group," said John Strickland, an analyst with JLS Consulting in London. 

"It's just that the timing seems to be so sensitive with this election coming up."

Aer Lingus dropped as much as 21 cents to €2 in Dublin - the most in 15 months - and IAG dropped as much as 1.8%.

Talks between a group of Government departments and IAG on its proposal to make an offer for Aer Lingus continue, the Department of Transport said in an e-mail statement. 

The group will be "engaging further" with IAG this week, the statement added.