merger that would create the world's largest airline, a source close to the negotiations said.

The talks have reached the formal stage, although no deal is imminent, the source told The Associated Press on condition of anonymity.

Continental, the fifth largest airline in the US, initiated the talks with Delta, the third-largest carrier in the US. To date, Delta is the only airline with which it has held discussions, the source said yesterday.

Houston-based Continental and Atlanta-based Delta would not comment. Both airlines service flights to and from Bermuda.

The airline industry was beset with a flurry of mergers nearly a decade ago but has been relatively stable recently.

This year, many airlines enjoyed record profits, and some industry analysts expressed concern over the prospect of a new wave of mergers. Delta bought Pan Am's European operations in 1991, a deal that worsened Delta's losses at the time by hundreds of millions of dollars.

"If Delta's management remembers what happened when they bought Pan Am, they should not even contemplate another acquisition,'' Samuel Buttrick, an airline analyst at Paine Webber, told The New York Times.

Analysts also said that the prospect of a Delta-Continental combination might send other airlines scrambling for merger partners just to keep up.

A merger would allow Delta, which has trimmed flights in the Dallas-Fort Worth area, to maintain its dominance in the South.

Delta has more routes to Europe than Continental, which is stronger in South and Central America.