Shares in Jet Airways surged as much as 19.7 percent on Wednesday after TV channel ET Now cited unidentified sources as saying Etihad Airways was close to a deal to purchase a 24 percent stake in the Indian carrier.
Abu Dhabi's Etihad has already paid a "token" amount of US$70m, and will likely pay US$400m in the first tranche of the deal, the channel reported.
A Jet Airways spokeswoman referred Reuters queries on the report to Etihad. Etihad said it did not have an immediate comment.
Indian TV channels said Etihad had bought Jet's slots at London's Heathrow airport for US$70m, but did not say whether that was a part of the stake buy agreement.
Jet shares were up 17.3 percent as of 0831 GMT, after having risen as much as 19.7 percent earlier in the day. Shares of smaller rival SpiceJet also surged 9.4 percent to INR37.85.
The Jet-Etihad deal would be the first since India relaxed ownership rules in September and allowed foreign carriers to buy up to 49 percent in local carriers, which are battling stiff competition and high operating costs.
Malaysia's AirAsia, Asia's largest budget carrier, also plans to launch a regional airline in India in a venture with the Tata group, marking a return to aviation for India's biggest business house, and betting on potential growth despite near-term issues.
Etihad, launched in 2003, is on a buying spree to compete with regional rivals Emirates and Qatar Airways. The Gulf carrier has taken stakes in Virgin Australia and Aer Lingus and raised its shareholding in Air Berlin and Air Seychelles.
Top executives from Etihad and Jet met Indian ministers earlier this month, but the deal faced a set-back later as the Gulf carrier's chairman told Reuters the deal needs to be revised.
Jet shares have fallen more than 27 percent since then through Tuesday.
Etihad will have to find a way around Jet's complicated shareholding structure before a deal can be finalised.
Tail Winds Ltd, the Isle of Man-based investment vehicle of Jet founder Naresh Goyal, currently holds 79.99 percent of Jet Airways.
According to Indian rules, foreign companies can hold a maximum 49 percent stake in local carriers, but so-called non-resident Indians like Goyal are exempted.
Goyal is likely to convert shares owned by its holding company into his personal stake to comply with foreign investment regulations, an Indian government source has said.
As a foreign company, Tail Winds cannot engage in share trades with another foreign company but Goyal can sell his personal stake.