UPDATE 1-Iberia signs 8 bln euro merger deal with BA

* Original terms of merger agreement unchanged

* Iberia can revoke deal if further pension problems found

(Writes through, adds detail and background)

MADRID, June 29 (Reuters) - Spanish airline Iberia IBLA.MC said on Tuesday it had signed an 8 billion euro ($9.8 billion) merger deal with British Airways BAY.L to create the world's third biggest airline after reaching an agreement over BA's pension deficit.

The merger was agreed under the terms announced in April but is still awaiting shareholder approval -- expected in November -- and three months of Iberia's scrutiny of BA's pension fund, which earlier had threatened to scupper the deal.

"Iberia has three months from the time the agreement (between BA and the trustees of its pension fund) is lodged with the UK pensions regulator to exercise its right to withdraw from the deal," the Spanish carrier said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a factbox on the terms and financial projections of the Iberia-BA merger, click on [ID:nLDE63708E] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The deal comes after European flag carriers were hit by low-cost carriers who took a bite out of their short- and medium-range flights.

Last Tuesday, British Airways said it had agreed a recovery plan for its 3.7 billion pound ($5.5 billion) pension deficit, potentially removing a final obstacle to the merger. [ID:nLDE65L07G] (Reporting by Jonathan Gleave; Editing by David Holmes) ($1=.6638 Pound) ($1=.8194 Euro)