Lufthansa and Swiss nearly came together in Star Alliance in 2003

Lufthansa will make an offer to buy out Swiss's small shareholders, which account for around 14% of its capital, if larger shareholders back the deal.

Swiss banks UBS and Credit Suisse, the Swiss government and the local Zurich authority together hold around 50% of shares, and corporates hold 36%.

"We will look at (the conditions), form an opinion and inform Swiss," UBS said.

'International traffic'

Swiss was created from the shell of collapsed predecessor Swissair in 2002, with the help of some 2.7bn Swiss francs ($3.6bn; �1.9bn) in fresh financing including some money from the state.

It has yet to make a profit since its creation.

The airline, regardless of talks with Lufthansa, aims to cut costs, with 800 to 1,000 job cuts pending.

The most important thing for the government is that Switzerland remains fully connected to international air traffic Elisabeth Meyerhans, Swiss government

Major shareholders would only be given a nominal sum for their shares but Lufthansa, which would be taking on Swiss's debt of 560 million francs, is hopeful they will accept.

Larger shareholders, including the government, want a deal that secures the future of airports in Zurich, Basel and Geneva, and retains the brand Swiss.

"The most important thing for the government is that Switzerland remains fully connected to international air traffic. Also important are the jobs," said Elisabeth Meyerhans, a government spokesman.

Lufthansa has said that if the bid is approved, it will then submit an offer to small shareholders "based on the average share price of recent weeks".

This could be valued at about 50 million to 60 million euros ($67-$80 million) for the 14% of shares in "free float".