Tour operator Soletur filed for bankruptcy

"The outlook was already bleak and the terrorist attacks only made it worse," Varig President Ozires Silva said last week concerning the financial situation of his company, which is $1.25bn in debt.

GE Capital, which leases planes to Varig, would not confirm or deny the report originating from Brazil, which cited unnamed sources close to Mr Silva.

A Varig spokeman told BBC News Online: "What's really behind Varig and its debt with GE is that the company is in the process of re-discussing the matter with the (aircraft) leasing companies".

"On what concerns the amount involved of nearly $200m, we do not confirm that," he said.

Varig, which currently employs 17,500, carries about 11.4 million passengers a year to 18 countries in four continents.

Pressure on Varig rose earlier this week when one of Brazil's largest and oldest tour operators Soletur filed for bankruptcy, with the loss of 450 jobs.

Soletur was one of Varig's biggest clients.

Troubled past

The airline, which has only made a profit once in the last 10 years, was already struggling before the US attacks because the Brazilian real's slide against the dollar had pushed up the cost of jet fuel and aircraft leasing.

Results for the first half of this year show Varig lost $204m, a record loss due largely to the higher cost of servicing its large debt.

After the US attacks, Varig laid off 1,700 employees, or roughly 10% of its workforce, reduced its fleet by 8% and dropped expansion plans for more flights to the US.

The Brazilian government has promised to give the country's deeply troubled airlines some debt and tax relief since the attacks on the US.

The country's airport operator has also given Varig extra time to pay outstanding debts.

An attempt earlier this year to raise cash by selling off its cargo and logistics unit failed.

Debt talks

Varig president Osires Silva held talks with GE Capital representatives last Friday.

Mr Silva said that discussions focused on the purchase of new planes as part of Varig's fleet renewal programme.

About $477m of the carriers debts stem from leasing aircraft mainly from GE Capital and Boeing.

But Standard & Poor's reported earlier this month that it was putting Varig on "credit watch" because it had doubts over whether debtors would extend a debt repayment waiver beyond the 15 October expiry date.

In July, a Brazil court denied a GE Capital request to force Varig's domestic rival Transbrasil into bankruptcy over a $3m debt.

Varig, a member of Lufthansa and United Airlines' Star Alliance, has reportedly been looking for a strategic partner.

But analysts said it might have trouble finding an investor because Brazilian law restricts foreign ownership to 20%.

A holding company managing the shares of employees controls 56% of the airline.