Insurance companies have threatened to withdraw war-risk cover, which is a legal requirement for airlines. Unless new terms are agreed by Monday, all European aircraft could be grounded, it emerged yesterday. Airlines around the world said insurance underwriters had given them notice they would cancel cover for war liabilities from midnight on Monday.

The cancellation means airlines and insurance companies will have to renegotiate the terms of cover in the light of the possibility of US military action in response to the terrorist attacks.

Details of the latest crisis facing the aviation industry emerged as the European Transport Commissioner called on national governments to help airlines pay the cost of extra security measures following last week's attacks in the US.

Speaking after a meeting with European airline representatives, European Commission vice-president Ms Loyola de Palacio said EU finance ministers should also consider taking action over sharply increased insurance premiums.

Mr Ray Neidl, an airline analyst with ING Barings, said the new premiums being discussed were "ridiculously high" and potentially sufficient enough to tip several already weakened carriers over the brink.

Airlines were lobbying Congress to exempt them from liability for damage on the ground, he added.

"There is zero posturing in this," said Mr Peter Walsh, an airline consultant with Mercer Management Consulting.

"Every airline around the world has been notified that coverage will be reinstated only for a higher fee."

"This is having a very wide-ranging impact," said Mr Graham Nichols, chairman of the Aviation Insurance Office's Association, which represents aviation insurers trading in the London insurance market.

"In the Gulf war only certain airlines were affected whereas now the potential risk of terrorism affects every airline."

However, one executive at a European insurer described the talks with the airlines as a "running process", arguing that contracts were being modified rather than scrapped.

The airline representatives who met the European Commission yesterday did not ask for a relaxation of EU rules on state aid to national carriers.

But Ms de Palacio said afterwards that the rules could be reconsidered "in the face of unforeseen and exceptional circumstances". EU finance ministers will discuss the crisis facing airlines when they meet in the Belgian city of LiΦge tonight.

The Commission insists that there is no question of cash injections from the EU to European airlines, despite the US government's decision to give US airlines up to $15 billion (€16.2 billion) in emergency aid.

"The EU does not have the budget for this but, faced with this unforeseen situation, there are some one-time solutions that can be considered," Ms de Palacio said.

EU officials believe that any compensation would have to be temporary and strictly limited to cover immediate losses caused by last week's attacks.

Mr Jean Cyril Spinetta, president of the Association of European Airlines, insisted that most airlines did not want state aid but wanted a more flexible application of EU rules governing the sector.

"We don't want subsidies; we don't want handouts," he said.

British Airways yesterday became the latest European airline to react to last week's events. It announced plans to cut 7,000 jobs and reduce its operations by 10 per cent.

"We face exceptional conditions which have forced us to take very tough decisions," said the company's chief executive, Mr Rod Eddington.

European planemaker Airbus also said yesterday it planned a hiring freeze in response to the attacks and could not rule out job cuts.

-(Additional reporting Financial Times service)