Only 54 of Varig's 71 planes are currently flying

The country's Civil Aviation Authority has blocked Varig's plan to let small local airline Ocean Air take over some of its unprofitable routes.

In turning down the deal, officials said flight slots and airport space could not be negotiated.

Varig is trying to turn itself around in the face of $3.3bn (�1.9bn) debts.

Staff protests

The rejection of the deal with Ocean Air came as hundreds of Varig employees held protests calling for the government to bail out the airline.

Staff at the airline want the government to come to their rescue

Yet Brazilian Finance Minister Guido Mantega said last week that such support would not be forthcoming.

In recent days Varig has had to cancel flights because it could not meet operating payments, and is currently only operating 54 of its 71 planes.

It is now studying plans to cut costs by returning 15 planes to leasing companies.

Meanwhile, Varig's former cargo operation, Variglog, last week offered $350m for Varig's commercial operations.