Aer Lingus and British Airways owner IAG is set to cancel its acquisition of rival Air Europa from privately held Spanish company Globalia, the group.
"International Airlines Group and Globalia confirm today they are in an advanced phase of negotiations to cancel the agreement," IAG finance chief Stephen Gunning said in a statement.
IAG agreed to pay €500m to buy the airline in January after the Covid-19 pandemic cut the original price in half and IAG struck a deal to defer payments for six years.
Air Europa provides connections to Latin America as well as serving destinations in Europe.
IAG had said the deal would boost the competitiveness of its Madrid hub and benefit consumers.
Competition regulators, however, were concerned the deal would reduce competition in the Spanish domestic market and on international routes to the country.
IAG also owns Spanish airlines Iberia and Vueling.
The remedies offered by IAG - to give up 13 short and medium-haul routes and two long-haul routes at Madrid and Barcelona airports - were not enough to assuage the concerns and a veto was likely, sources have said.