UPDATE 8-British Airways, Iberia agree to $7 bln merger

* BA to hold 55 pct of new company, Iberia 45 pct

* Companies hope to close deal by end of 2010

* See eventual annual synergies of about 400 million euros

* Iberia's Vazquez to be chairman, BA's Walsh CEO

* BA shares close up 7.5 pct, Iberia up 11.8 pct (Adds cost savings, regulatory hurdles, pension issue)

By Tracy Rucinski and Rhys Jones

MADRID/LONDON, Nov 12 (Reuters) - British Airways (BAY.L) and Spain's Iberia (IBLA.MC) announced on Thursday a preliminary agreement for a $7 billion merger to create the world's third-largest airline by revenue.

The deal, which the companies hope to close by the end of 2010, ends the British flag carrier's long pursuit of Iberia to create an enlarged group, able to cope with the industry's largest downturn in decades.

BA shareholders will have 55 percent of the new firm, with 419 aircraft flying to 205 destinations, while Iberia will hold 45 percent.

In a joint statement, BA and Iberia said the merger would provide "enhanced scale to compete with other major airlines and participate in future industry consolidation."

The new company will combine British Airways' strong position in Europe-to-North America traffic with Iberia's Latin American business, and will potentially be reinforced by a planned alliance with AMR Corp's (AMR.N) American Airlines.

Iberia's chairman Antonio Vazquez will be chairman of the new company, while BA's Chief Executive Willie Walsh will be CEO. Each airline will have seven members on the new 14-member board.

The deal will create a new holding company, which will own the two airlines. The two companies will have dual hubs in London and Madrid, and will keep their own licences, codes and brands for the first five years of the merger.

This mirrors the structure set up by Air France-KLM (AIRF.PA) from the Franco-Dutch merger in 2004, which created a holding company plus two operational units to preserve national identities and bilateral international landing rights.

Ahead of the announcement of a deal, BA shares closed 7.5 percent higher at 206.8 pence, while Iberia shares ended up 11.8 percent at 2.22 euros. -----------------------------------------------------------