The Office of Fair Trading is preparing to tell ministers that the alliance, which would give BA and American up to 60 per cent of key transatlantic air routes, should not be sent to the MMC.
BA has made it clear that it will walk away from the alliance if it is referred. A lengthy investigation by the MMC could also scupper hopes of an open skies agreement being signed between Britain and the US because it is conditional on the alliance going ahead.
Instead the OFT looks set to approve the tie-up, on condition that the two carriers give up some of their lucrative take-off and landing slots at Heathrow. BA's chief executive, Robert Ayling, has insisted that the two carriers should not be forced to surrender slots as the price for regulatory approval.
But industry observers believe BA and American will have to give ground to accommodate the objections from rival carriers, led by Richard Branson's Virgin Atlantic and United Airlines of the US.
Robert Crandall, the chairman of American Airlines, in Britain this week on a "hearts and minds" mission to win support for the alliance, has floated the idea that the two carriers might lease slots at Heathrow to other carriers rather than give them up outright.
He is also promising to increase American's regional services from Manchester and Birmingham if the alliance is approved. At present American flies only to Chicago from the two regional airports but would launch new services to Dallas, Miami and Los Angeles if the alliance is given the green light.
Mr Crandall saw the Deputy Prime Minister, Michael Heseltine, yesterday to argue American's case and flies back to Dallas at the end of the week.
The OFT's recommendations are expected to be passed to the President of the Board of Trade, Ian Lang, in the next 12 days, possibly as early as Friday.
A decision not to go for an MMC referral would represent a victory for the Department of Transport, which has given the alliance its broad backing.
Intense discussions between BA, American and OFT officials have been continuing for weeks aimed at finding a compromise acceptable to the two carriers without the need for an investigation by the MMC. The current stumbling block is thought to lie more with American, which is believed to be insisting on hanging on to the bulk of its Heathrow slots.
Separately, the regulatory hurdles which the alliance needs to clear became even more complex yesterday when the European transport commissioner, Neil Kinnock, said the EC's own investigation into airline alliances, begun after the BA-American announcement, would be unlikely to reach any conclusions until next year.
"It would be very difficult before Christmas. There's a lot of information to be gathered and some of that information is not very easily available," said Mr Kinnock.
It also emerged that the European Commission has decided to extend its inquiry further, casting further doubt on BA's aim of getting the alliance under way by next April.
The EC is already investigating seven alliances between US and European carriers and is examining proposals by United to transform existing links with Lufthansa and the Scandinavian carrier SAS into a trilateral partnership.