The Prime Minister and John MacGregor, Secretary of State for Transport, are both said to be anxious not to see the airline collapse because of the resulting job losses and threat to Gatwick that would entail.
But their regulatory advisers, led by the Civil Aviation Authority, are expected to urge strongly that any merger between the two would need to be fully examined either by the Monopolies and Mergers Commission or competition authorities in Brussels.
'Unless BA comes up with some trump card that gets the Government off the hook it is hard to see a deal not being referred,' one official said. 'The Government cannot be seen to be condoning something which, by definition, will reduce competition.'
BA refused to comment last night. But it is not expected to be interested in entering a deal with Dan-Air if it would then be subject to the lengthy delays and uncertainty that an investigation by the MMC or Brussels would create.
The airline broke off takeover talks with Dan-Air three weeks ago but was approached again last Friday by David James, chairman of Dan-Air's parent company, Davies and Newman, to discuss other ways of securing a tie-up.
British Midland has already served notice that if BA and Dan- Air reach agreement then it would expect the merged airline to be subjected to a full and open investigation.
Richard Branson, the Virgin Atlantic chairman with whom Mr James ended rescue talks at the weekend, has also made it clear that he would expect Dan-Air to surrender slots and routes at Gatwick and Heathrow if it succeeded in forging a link with a large carrier such as BA.
Neither of these outcomes is likely to be acceptable to BA. In any event, BA is thought to be more preoccupied at the moment with gaining approval for its dollars 750m investment in USAir than with securing a link with Dan-Air.
Commentary, page 23