UPDATE 4-Continental not merging with UAL; seeks alliance

(Adds UAL loss)

By Jui Chakravorty Das

NEW YORK, April 27 (Reuters) - Continental Airlines Inc (CAL.N) has called off talks with United Airlines (UAUA.O) because of United's weak financial condition and a feeling that a merger would risk its own financial health, a source briefed on the matter said on Sunday.

The source also said Continental is in "advanced talks" with British Airways PLC (BAY.L) and American Airlines (AMR.N) about a potential alliance, with plans to seek antitrust immunity.

American did not immediately return a call seeking comment and Continental was not reachable for comment. United Airlines Chief Executive Glenn Tilton, who has been a proponent of consolidation, said the company's strategy is consistent.

"Consolidation is underway - ensuring you have the right partner is everything," he said in a statement. "We will pursue all options to ensure a strong, sustainable future for our airline."

Sources had told Reuters earlier this month that United was also in serious merger talks with US Airways (LCC.N).

Continental's decision comes after Delta Air Lines (DAL.N) and Northwest Airlines NWA.N said nearly two weeks ago they planned to merge and become the world's largest airline, seeking to counter skyrocketing fuel prices, a weak economy and growing competition from European carriers as trade barriers fall on trans-Atlantic travel.

Continental said on Sunday in a letter to its employees it has chosen not to merge with any other airline at this time but will continue to consider an alliance with other carriers.

"We have significant cultural, operational and financial strengths compared to the rest of the industry, and we want to protect and enhance those strengths -- which we believe would be placed at risk in a merger with another carrier in today's environment," Chief Executive Larry Kellner and Vice President Jeff Smisek said in the letter.

Continental's decision comes a few days after United's shares plunged more than 40 percent in one day when it posted a loss of $537 million in the first quarter.

One source familiar with the matter said the development came as a surprise to United, which had been negotiating in expectation of reaching a deal by late this week.

URGENCY TO CUT COSTS

After racking up $35 billion in losses and finally emerging from a 5-year slump in 2006, U.S. airlines are hoping mergers could give them greater market power to reduce flights and raise fares.

The airlines also face a renewed sense of urgency to cut costs as jet fuel prices have more than doubled since the start of last year.

Continental, which has said it would prefer to remain independent unless the competitive landscape changes, had laid most of the groundwork for a merger with United, sources had told Reuters.