India took a big step to open up its hard-pressed aviation sector to investment by foreign airlines, with the aviation ministry saying it would recommend that the cabinet allow foreign carriers to take up to a 49 per cent stake.

India bars foreign carriers from buying into Indian airlines, but foreign investors are allowed to invest up to a cumulative 49 per cent stake.

"The question was to allow other airlines to participate in FDI. I discussed it with the finance minister and he agreed," Civil Aviation Minister Ajit Singh told reporters.

"We will move the note to the cabinet now."

Shares of Indian airlines surged by 7 to 12 per cent ahead of the meeting of a group of ministers in New Delhi.

India's loss-making airlines are grappling with high jet fuel prices, low fares, and an economic slowdown.

A decision to open up the sector to foreign carriers would be a lifeline to domestic carriers, notably debt-laden Kingfisher Airlines.

All but one of India's six main airlines are loss-making as they engage in aggressive price competition.

Indian airlines are expected to lose up to $3 billion in the fiscal year that ends in March. State-owned Air India, operating on government life support, is expected to account for more than half of that, the Centre for Asia Pacific Aviation has said.

"We realised that FDI is one of the factors that will help the industry survive the current financial problems," Singh said.

Ahead of the announcement, shares of Jet Airways India's leading airline, closed up 10.3 per cent.

Budget carrier SpiceJet (SPJT.BO), whose CEO has said his airline would evaluate selling stake to a foreign carrier if the government were to change FDI rules, rose 10 per cent. Kingfisher ended up 4.8 per cent.

Despite heavy losses, domestic air traffic increased 17.6 per cent to 55 million passengers in the first 11 months of 2011, government data shows.

"India is one of the fastest growing markets today and nobody wants to miss out on the growth story. And foreign airlines will not come with a short-term view of one year," said Sharan Lillaney, aviation analyst at Angel Broking.

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