Pan American World Airways and Trans World Airlines, two of the oldest names in aviation history, announced yesterday they would be willing to merge in an effort to keep the struggling carriers alive.

A combination of the two airlines would represent another large contraction in the airline industry, leaving it with half as many major carriers as there were in the early 1980s.

Within the past two months, Continental Airlines has joined Eastern Air Lines in bankruptcy and both TWA and Pan Am have announced plans to sell many of the European routes that were among their most prized assets in their heyday as international carriers. In the end, only a handful of nationwide "mega-carriers" is expected to survive, industry analysts say.

"Suffice it to say that we are entering the last stage of the industry consolidation and where it leads us only time will tell," said Julius Maldutis, an airline industry analyst at Salomon Brothers Inc. in New York.

Any deal between Pan Am and TWA would hinge on numerous financial and legal conditions; indeed, TWA Chairman Carl Icahn suggested that Pan Am might have to seek bankruptcy protection to make it eligible for special financing that would facilitate the merger.

Pan Am Chairman Thomas G. Plaskett, in a letter to Icahn yesterday, said, "I am in complete agreement that given the state of the industry, the time is right for us to see if we can put together a proposal that can both win approval from our shareholders and have every likelihood of being consummated."

In many ways the problems afflicting Pan Am and TWA typify those hitting other carriers -- high fuel costs, heavy debt loads, expensive labor costs and dwindling air travel.

As the number of major national airlines declines, many in Congress and elsewhere worry that the shakeout could mark the end of a decade of discounts and cut-rate fares that were spurred by the industry's deregulation. American, United and Delta airlines together already account for about half the U.S. air travel market.

"When you have less competitors and they're all high-cost competitors, fares will go up," said Bill Compton, head of the pilots union bargaining committee at TWA.

With the bonanza of discounts brought on by intense competition, airline travel suddenly became much more affordable. No longer the reserve of the rich, the nation's airports were turned into busy hubs that began to resemble bus stations. Over the past decade, fares have increased at a mere 3.7 percent annual pace, about half the rate of inflation over that period.

The rush of new carriers that appeared since the industry's deregulation in 1978 was followed by a round of mergers in the 1980s. Many of the newer carriers disappeared, along with the deep discounts on which they depended.

Today, no new carriers wait in the wings, ready to challenge the dominant airlines. Extensive computer reservation systems, frequent-flier programs and powerful airport hubs operated by the industry leaders make it virtually impossible for a new airline to enter the field except in the smallest of niche commuter markets, according to most industry analysts. Instead, the Bush administration is looking at the possibility of increasing competition by allowing foreign carriers to prop up failing airlines or enter the U.S. market in some other way.

American Airlines Chairman Robert L. Crandall figures that his airline, arch-competitor United, as well as Delta, Northwestern, USAir and several strong foreign carriers, including British Airways, Lufthansa, Japan Air Lines, All Nippon Airways and Air France, will survive.

"I think it is fair to say the world is pretty well populated with mega-carriers," Crandall said.

"What is emerging in these very large companies is a number of companies each of which will compete with every other company in almost every market. ... The primary effect of consolidation is to intensify competition."

If successful, the merger of Pan Am and TWA would combine two of the financially weakest U.S. airlines. But the deal outlined yesterday reflects just how frail the two carriers have become.

TWA first proposed a combination with Pan Am last month, and has refined the offer since. The deal tentatively accepted by Pan Am yesterday is worth $375 million, but the acceptance contains several conditions, most of them aimed at supplying funds to keep Pan Am flying through the spring, when its business traditionally picks up.

In his letter to Icahn, Plaskett said Pan Am's directors had concluded that a merger with TWA "would be advantageous to our shareholders, employees and other constituencies."

But Plaskett said his airline "requires bridge financing to cover its financial needs during the several-month period -- coinciding with our low traffic season -- that we expect it will take to obtain necessary regulatory and shareholder approval."

In a letter Icahn sent to TWA employees, he suggested that Pan Am might be better off filing for voluntary bankruptcy protection to make it easier for TWA to raise cash from banks.

The type of financing under consideration is called "debtor-in-possession financing" and is usually only arranged in bankruptcy cases. Icahn, who would not comment publicly yesterday, is known to believe this is the only way TWA can get bank financing in the current tight economy.

A source close to Icahn said TWA had approximately $75 million in cash itself and would have to raise between $100 million and $200 million from banks to meet Pan Am's operating needs. "It's going to be difficult," the source said.

Pan Am's need for cash is critical. To keep up with its day-to-day costs, the carrier has deferred $32 million in payments to two major suppliers, United Technologies Corp. and Airbus Industrie, and failed to make a $30 million payment owed the federal Pension Benefit Guaranty Corp.

Pan Am also has previously announced plans to sell its routes from the United States to London and other assets to United Airlines for $400 million. That deal has been bogged down by squabbling between the United States and Britain, but a Pan Am spokesman said yesterday it would not be affected by the proposed merger with TWA.

President Bush is expected to discuss the Pan Am-United deal with British Prime Minister John Major during their meetings this weekend at Camp David.

Meanwhile, TWA has a deal with American Airlines to sell its London routes for $445 million. Yesterday, in a move that further illustrates the difficulties airlines are having in raising bank financing, American Airlines filed documents with the Securities and Exchange Commission outlining plans to sell stock to help finance the TWA route acquisition.

The fire sales of routes, and any deal between TWA and Pan Am, are certain to be looked at carefully by the administration. Both the Transportation and Justice departments would have to approve a TWA-Pan Am merger, and pressure to consider the consequences to competition of such a teaming is likely to be intense. Neither federal agency would comment on the proposed merger late yesterday.

"What we've got to do is to sort out those transactions that make sense; those that don't. Give priority to those that do and make sure that when we're making a decision it's going to increase or enhance competition," Transportation Secretary Samuel K. Skinner said recently on ABC's "Nightline" news show.

"I think everybody's predicted a consolidation, and I think it's being accelerated a little bit because of what's going on in the {Persian Gulf}," Skinner said. "I don't think that's necessarily bad. If we can have four or five really very competitive airlines that are strong, they can maintain a very competitive system and keep some of the benefits that we've been reaping." Staff writer Mark Potts contributed to this story.