Air France is talking to KLM about a possible takeover that would create a European airline giant, a French newspaper reports.
Financial daily L'Agefiquoted sources close to the talks saying France's plan to reduce its stake in Air France might include an exchange of shares for KLM stock.
An Air France spokeswoman declined to comment on the report, and officials at the French Treasury were not immediately available.
KLM also had no comment on the deal, which could kickstart long-awaited consolidation if approved by the European Commission.
Shares in the Dutch carrier responded positively to the news, rising more than four per cent in early trade. They were up 3.78 per cent at €9.33 at opening, outpacing European peers.
Air France was up 0.28 per cent at €14.51 in line with Paris' Cac-40 index.
KLM, Europe's fourth largest carrier, has discussed joining airline alliances that include Air France and British Airways.