Sir Richard Branson's airline Virgin Atlantic confirmed is holding talks with Lufthansa "regarding the future" of UK carrier Bmi, which the German airline now controls.
Virgin said the discussions "may or may not lead to an agreement" and a further announcement would be made "in due course".
In October, Lufthansa, one of Europe's leading carriers, said it had taken a controlling 80% stake in Bmi - formerly British Midland Airways - after buying founder Sir Michael Bishop's 50% share.
Lufthansa already held a 30% stake in Donington-based Bmi before adding to its shareholding in last October's £318 million deal. The remaining 20% stake in Bmi is held by Scandinavian airline SAS.
Bmi holds around 12% of the take-off and landing slots at Heathrow airport where it is the second-biggest airline after British Airways.
When the sale of Sir Michael's shares was announced in October, Virgin expressed interest in a possible link-up with Lufthansa.
Virgin chief executive Steve Ridgway said at the time: "Everyone has speculated that it would make sense for Virgin Atlantic and Bmi to combine their long-haul and short-haul networks.
"There is now a major opportunity to do that and create a new and even more effective competitor to BA. I am sure that Lufthansa realise the future opportunities and this could be a really good example of the right industry consolidation."
Bmi carried 10.6 million passengers last year and currently flies to 51 destinations using a fleet of 51 planes. It has 4,300 employees and last year had turnover of £1,023 million.
This compares with Lufthansa statistics that show the German carrier flew 83.1 million passengers last year and currently operates to 209 destinations with a fleet of 276 planes.
Founded in 1984, Virgin currently flies to 30 destinations and has 38 aircraft. It carried around six million passengers last year and its 2007-08 profit was £60 million.
With the world economy in crisis, more and more airline mergers and alliances are likely.
Virgin has been openly hostile to the BA proposed link-up with giant US carrier American Airlines and has also expressed concern at another possible tie-up between BA and Australian airline Qantas.
With the Lufthansa-Bmi situation, Virgin is expected to play up the fact that its own long-haul routes would perfectly complement Bmi's short-haul network.
Virgin is thought to believe that competition chiefs would look more favourably on a Virgin-Bmi-Lufthansa link-up than on alliances where the carriers involved already compete on some routes.
