Aer Lingus and British Airways owner IAG is set to cancel its acquisition of rival Air Europa from privately held Spanish company Globalia after European regulators indicated they would not allow it to go through without further concessions.

"International Airlines Group and Globalia confirm today they are in an advanced phase of negotiations to cancel the agreement," IAG finance chief Stephen Gunning said.

The deal for Air Europa, which provides connections to Latin America as well as serving destinations in Europe, was designed to help IAG's Madrid hub to compete more effectively against its European rivals and benefit consumers.

While most observers expected IAG to pull the deal once the Covid-19 pandemic struck, it instead agreed to cut the price in half to €500m and negotiated a deal to defer payments for six years.

European competition regulators, however, were concerned that the takeover would reduce competition in the Spanish domestic market and on international routes to the country.

The remedies offered by IAG - to give up 13 short and medium-haul routes and two long-haul routes at Madrid and Barcelona airports - were not enough to assuage the concerns and a veto was likely, sources have said.

As well as BA and Iberia, which is the market leader between Europe and South America, IAG also owns Barcelona-based Vueling and Level.

Citi analysts said they believed the decision to cancel the deal was widely expected given the regulatory hurdles thrown in its path by the European Commission and the UK's Competition and Markets Authority.

By walking away before the deal is vetoed by regulators, IAG will be better positioned to make another attempt in the future, sources said.