The merger, which was proposed in May last year, has been called off because of regulatory concerns and the worsening economic outlook.

In a statement United said: "UAL Corporation (United A) and US Airways Group, Inc have confirmed that they are in discussions regarding the possibility of terminating the proposed merger between the two companies prior to the August 1 termination date."

Earlier, an unidentified source at United told Reuters news agency: "It is unlikely we will get this through antitrust review. That is why we are exploring early termination of the agreement."

In an effort to secure regulatory approval, United had agreed in January to sell some US Airways assets to American Airlines.

But the US Justice Department remained concerned about the concentration of market power, prompting Transportation Secretary Norman Mineta to hint last month that the merger would not be approved.

United is already by some measures the world's biggest airline, and a takeover of domestic-focused US Airways could have given it unhealthy dominance in certain regional markets, regulators feared.

Great expectations

The deal also rested on rosy economic expectations.