The online edition of Kauppalehti business daily had cited an IAG source as saying that talks between the British Airways owner and Finnair had advanced, adding that news could soon follow on those discussions and ownership arrangements.

"We haven't been in any discussions with Finnair," an IAG spokeswoman told Reuters.

Shares in Finnair, which is 56 percent-owned by Finland, rose as much as 6 percent on the report before paring gains to trade up by about 1 percent.

Finnair also denied the report.

"Finnair is not active, and is not aware of its shareholders being active, in any such negotiations," the company said in a statement.

Prime Minister Juha Sipila said the government had not prepared to restructure Finnair's ownership but added that it will discuss the issue in the coming months.

"The company itself surely holds different discussions and negotiations," he told STT news agency. "At this point,(state majority ownership) is the effective policy and nothing else has been decided."

Some politicians and the company itself have argued that the state should lower its stake to open way for alliances and deals.

Analysts have said that Finnair would complement IAG well. Finnair has had hard time fighting the challenge from discount carriers in Europe, but it is now on track to turn an annual profit after deep cost-cuts and a focus on Asian routes.

IAG has led a charge to consolidate Europe's airline industry, adding Ireland's Aer Lingus in August to a portfolio already comprising Spain's Iberia and Vueling.

IAG said at an investor day on Nov. 6 that it was not active on any acquisition proposal but reiterated its interest in industry consolidation.

Chile-headquartered LATAM Airlines this week said it was not in talks to sell a stake to IAG, after IAG said at the same investor day that it wanted to develop a closer relationship with LATAM.

(Reporting by Sarah Young and Jussi Rosendahl, Additional reporting by Sudip Kargupta; editing by Mark Potter and David Goodman)