The merger between British Airways and Iberia has been dealt a blow following news that the pension deficit of the British flag carrier has grown by £1.6bn over the past year.

BA has revealed that the deficit of its two largest pension funds has mushroomed to £3.7 billion, up from £2.1 billion last year.

The hike has raised fears that it will not be able to make long-term payments to its entire workforce, which has always the main hurdle in the proposed merger with Iberia.

The Spanish airline can walk away from the proposed deal if “the outcome of the discussions between British Airways and its pension trustees is not, in Iberia’s reasonable opinion, satisfactory”.

BA has been putting together a pension fund recovery plan in order to tie up the merger deal with Iberia by the end of next year. This is likely to include capital injection.

However news that deficit has widened yet further it likely to put further pressure on Iberia to wash its hands of the deal.

Roger Maynard, BA’s director of alliances, who is in managing the Iberia tie-up, has resigned as chairman of the pension trustees to avoid any conflict of interest.

A BA spokesman acknowledged that yesterday’s shortfall was not significantly worse than had been indicated in September. He said that BA was confident the deal would go ahead depending on negotiations with the regulator, although admitted that Iberia had the right to call off the merger should it wish.

Iberia said yesterday that the deficit was “not unexpected”. A spokeswoman confirmed that Antonio Vázquez, the company’s president, had previously expressed confidence that “an acceptable solution” could be found.

BA’s Airways Pension Scheme (APS) had a £22 million surplus in 2006 but this has turned into a £1 billion deficit in March this year. Meanwhile its New Airways Pensions Scheme (NAPS) had grown from £2.1 billion to £2.7 billion.

The APS has about 31,000 members, almost all retired. Of the 68,800 members of NAPS, only 25,300 still work for the airline.