Under the agreement, Easyjet will have an option to buy BA's subsidiary, Deutsche BA (DBA), at any time up to the end of March 2003.

Easyjet is also in negotiations to buy its no-frills rival, Go.

Easyjet's chief executive Ray Webster said talks with Go were at a very advanced stage and an announcement was likely within a "matter of days".

Mr Webster said there was a "compelling set of logic" for a deal between the two airlines, as only a few routes overlapped.

"We have always been interested in Go and thought that if a deal was going to be done, the right time was once it was profitable and before it floated, which is now," he added.

Mr Webster also revealed that Go chief executive Barbara Cassani, who is said to be upset at the deal with Easyjet, had been offered an executive position at the combined group.

Big plans for Germany

Also on Wednesday, Easyjet announced profits of �1m in the six months to the end of March.

Mr Webster said of the new deal with DBA: "Germany is the biggest domestic air market in Europe.

"But it is very poorly served by low-cost airlines.

"This arrangement gives us the opportunity to establish Easyjet as the largest low-cost airline in Germany in one step".

Deal terms

Easyjet will pay 5m euros ($4.5m; �3.1m) to help turn DBA into a low-cost airline.

The airline has also agreed to pay 600,000 euros a month until the exercise of the option.

If it does go ahead and buy the airline, Easyjet will pay a further amount of between 30m euros and 39m euros.

DBA said the decision to sell the company was in line with British Airways' plans to cut costs and return the overall business to profitability.

More passengers

The company's profit of �1m in the six months to the end of March compares with a loss of �10m during the same period last year.

The airline also said passenger numbers increased by more than a third.

Easyjet added that 90% of its passengers were now booking their flights over the internet.