Shares of Japan Airlines <9205.T> fell nearly 7 percent on Wednesday after a newspaper said the carrier's main creditor and the finance ministry support bankruptcy as a way to restructure the heavily indebted airline.

The report in the Nikkei business daily added to growing speculation that JAL, Asia's largest carrier by revenues, was headed for bankruptcy as part of a rescue plan being hammered out by a state-backed turnaround fund and Japan's largest banks.

I get the impression from the news that JAL has gone one step closer to a court-led bankruptcy, said Ryouta Himeno, transport analyst at Mitsubishi UFJ Securities.

JAL shares have swung violently over the past few weeks. They surged 34 percent in the past two days on news the government was aiming to boost its short-term funding, bouncing back from a 24 percent plunge on the last trading day of 2009.

The state-owned Development Bank of Japan said after the market closed on Wednesday it has decided to double its credit line for JAL to 200 billion yen ($2.2 billion).

The additional funds will keep the carrier operating until the turnaround fund, called the Enterprise Turnaround Initiative Corp of Japan (ETIC), decides if it will rescue JAL.

The ETIC has proposed a bankruptcy procedure as the most transparent way to restructure JAL, and is now in the process of convincing creditors, sources have told Reuters.

A bankruptcy would complicate JAL's talks with Delta Air Lines Inc and American Airlines , both of which are courting it with promises of cash and revenue growth through membership of their rival global alliances.

The ETIC is planning to have JAL file for protection under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the United States. This would dent the value of JAL shares, if not render them worthless, and likely trigger greater losses for creditors than in an out-of-court restructuring.

In addition, some government officials have expressed worries over potential disruption to air travel. A bankruptcy could make suppliers of fuel and other business partners wary of dealing with JAL and could hit ticket sales.

But the Nikkei newspaper reported on Wednesday that the state-owned DBJ, the airline's largest creditor, and the Ministry of Finance were in favor of bankruptcy in coordination with financial support from the ETIC.

The Development Bank declined to comment. The Ministry of Finance said the bank would make its own decision on JAL.

The ministry is not in the position to say whether it supports a bankruptcy proceeding or a bank-led bailout for JAL and has told the DBJ to make a judgment on its own as any other financial institution would do, a MOF official said.

JAL is seeking its fourth state bailout since 2001 as it grapples with $16 billion in debt, a massive pension deficit and dozens of unprofitable flight routes.

It applied to the ETIC for help in late October. The ETIC, which can draw on 1.6 trillion yen in state-guaranteed funding to provide financial aid to ailing firms like JAL, is expected to make a decision on whether to support it in the next few weeks.

Shares of JAL fell 6.7 percent to 84 yen, underperforming a 0.7 percent gain in the benchmark Nikkei average <.N225>.

JAL's stock lost two-thirds of its value in 2009 while the spread on its five-year credit default swaps, which are used to insure against debt default, have been quoted at extremely distressed levels above 7,000 basis points.

(Additional reporting by Taiga Uranaka and Rie Ishiguro; Editing by Chris Gallagher and Edwina Gibbs)

Japan Japan Airlines American Airlines Fall