Abu Dhabi's Etihad Airways has held initial talks about a merger with bmi that could value the British airline at up to 600 million pounds ($1.1 billion), the Sunday Times said.

The newspaper, quoting unidentified senior sources in the Gulf, said Etihad had approached both bmi and Lufthansa, the German airline that owns a stake in bmi.

Lufthansa has an option to take control of bmi under a private agreement between the German group and bmi's majority owner, entrepreneur Michael Bishop.

However, the Sunday Times said Lufthansa was understood to want to sell its stake for about 200 million pounds and that talks were held with Etihad over the summer.

Lufthansa is in talks to buy Scandinavia's loss-making SAS as it hunts for bargains among airlines hit by crippling fuel costs and economic weakness, sources familiar with the matter told Reuters on Friday.

Lufthansa declined to comment. Bmi was not immediately available for comment. Etihad could not immediately be reached.

Bmi's main asset is its control of 11 percent of the highly-prized airline slots at London's Heathrow airport.-Reuters