THE controversial takeover of loss-making airline BMI by British Airways' parent firm moved a step closer yesterday as the UK's market regulator declined requests to scrutinise the deal.

Though acknowledging there was "significant concern" for passengers travelling between Scotland and Heathrow, the Office of Fair Trading (OFT) said the job of addressing these issues was best undertaken by the European Commission.

The OFT decision provoked disappointment from Virgin Atlantic, the leading rival bidder for BMI, and Labour, which had referred the takeover to the OFT. Both said it would lead to fares being hiked and services being cut, though the claims have been disputed by International Airlines Group, formed last year by the merger of BA and Spanish airline Iberia.

The £172.5 million purchase of BMI from Germany's Lufthansa was announced in December and the European Commission has until March 31 to rule on whether to approve the deal.

Explaining the decision, Sheldon Mills, the OFT's director of mergers, said: "The proposed acquisition of BMI by IAG has generated a significant level of concern in the UK especially in Scotland, the north west of England and Northern Ireland.

"We consider that the transaction should be subject to a careful and detailed review and we will continue to work closely with the European Commission to ensure that UK airline passengers will not lose out."

The ruling comes after Willie Walsh, IAG's chief executive, warned last month that routes connecting Heathrow to Aberdeen and Edinburgh would be lost if the takeover was blocked as BMI would collapse, leaving its landing slots to be hived off to long haul airlines.

An IAG spokesman said: "We will continue to work closely with the European Commission authorities and are confident they will approve the deal."

However, Virgin Atlantic accused the OFT of passing the buck. "We're very disappointed that the OFT has failed to take responsibility for competitiveness in the UK aviation market," a spokeswoman for the airline said, adding that it would "fundamentally change the landscape of UK aviation".

Shadow Scottish Secretary Margaret Curran, who referred the deal to the OFT, said she would ask the European Commission to consider the impact of the takeover on Scottish passengers and businesses and to consider the risk of reducing competition. She said: "The OFT has now decided that these issues are best addressed at a European level and the Commission must now conduct a proper scrutiny of this proposed sale to ensure that UK airline passengers will not lose out."