At the end of three days of talks with US officials last week, Ian Lang, President of the Board of Trade, demanded that the airlines give up 168 of their 3,280 slots to gain UK regulatory approval of the deal and avoid a reference to the Monopolies and Mergers Commission.
British Airways protested that such conditions were "unprecedented" and would demand compensation for the loss of slots "at fair market value".
"These are tough conditions, and we will be requiring compensation," said a BA spokes-man. "This is not over yet by any means." American Airlines took a more circumspect view, saying the terms were not a "deal-breaker".
It praised the DTI's stance in avoiding an automatic reference, while still regretting that the conditions were "far more severe than those imposed on similar airline alliances".
Of the other airlines with vested interests in the transatlantic market, United Airlines also "broadly welcomed" the news from the DTI.
However, Virgin Atlantic, which arguably stands to lose most in a BA- American tie-up, condemned the conditions imposed by Mr Lang as "wholly inadequate" and also criticised BA's plans to sell their landing slots to the highest bidder to comply with the conditions.
Virgin's hope is that the conditions set out by Mr Lang will be further tightened when the consulting period comes to an end on 10 January, and that the deal will still be referred to the MMC. "The days of allowing a national carrier monopolistic rights are gone," said a spokesman for Virgin Atlantic. "The sooner the British and American governments realise this, the better off consumers will be."
He added that the deal should be separated from the talks over "open skies" between British and American regulators, which broke up on Friday without reported progress and are expected to to resume in the new year.
The issues to be discussed at the next meeting include: the rights of British and American carriers to pick up passengers in each other's airports; the rule forbidding US government personnel or the US Postal Service from using non-American airlines; ownership rules currently limiting foreigners to 25 per cent stakes in US carriers; and increased access to Heathrow - widely viewed as the most important international airport in the world.
The Virgin spokesman said that any tie-up between the two largest transatlantic carriers linked to an open skies deal would have adverse effects on the British aviation industry's pre-eminence in the world market.