The European Commission gave on Wednesday the green light to the merger of British Airways PLC and Spanish airline Iberia Lineas Aereas de Espana SA, which will create Europe's third-largest airline by revenue.

"The transaction will not significantly impede effective competition on any of the markets concerned by the proposed merger," said the commission, the European Union's antitrust body.

It also said that the combination won't have a significant impact on the cargo and ground handling markets.

British Airways and Spanish airline Iberia signed a deal in April to merge and create one of the world's biggest airline groups after provisionally agreeing to take this step in November last year.

The new company will be called International Airlines Group, but the BA and Iberia brands will continue to operate as normal.

The company will have its headquarters in London, with BA shareholders retaining 55% ownership of the company.

In total the group will operate 408 aircraft and carry more than 58 million passengers a year, the two companies said.

The merger is seen as a chance for the two airlines to cut costs following two very tough years for the airline industry.

Both BA and Iberia are expected to report heavy losses this year, with BA predicted to announce its biggest annual loss since privatisation.

The airlines are also regarded as a good match, having few overlapping routes.