Iceland's flag carrier Icelandair bought 8.4 per cent of Britain's easyJet yesterday but stopped short of launching a takeover bid for the low-cost carrier.

EasyJet shares earlier closed up 16 per cent after more than a quarter of its stock traded amid speculation an Icelandic airline could be building a stake or mulling a takeover.

Cash-laden Icelandair said it bought the stake as a long-term trade investment and may increase its share in the short term.

"We have a positive opinion of the easyJet business model and we think that the company has a bright future," Icelandair chairman Mr Hannes Smarason said in a statement. Shares in easyJet closed at 152 pence, valuing the company at around £609 million.

Over 87 million shares had traded, more than 10 times the daily average.

The rally was spurred by market speculation and a media report that either Icelandair, Air Atlanta Icelandic or Iceland Express may be interested.

Shares in easyJet - Europe's most successful low-cost carrier after larger rival Ryanair - hit an all-time low late last month on concerns about rising fuel costs and falling fares as competition bites.

"Whether this is a precursor to a bid is much more difficult to say," Dresdner Kleinwort Wasserstein analyst Mr Mike Powell said earlier before Icelandair confirmed it had bought a stake.

"Anyone who gets involved in easyJet at this stage is going to be taking on a fair amount of risk. They are going to be taking on the oil price risk and they are taking on the risk of a very tough winter."

Reykjavik-based Icelandair said in a statement that the investment was part of the company's new policy to invest in sectors where it had specialised knowledge.

Mr Smarason said last week Icelandair was looking to expand through acquisitions.

"Our intention is to become very aggressive," he said.

Icelandair is owned by about 5,000 Icelandic shareholders.

Its annual turnover is £315 million and it flies routes from Iceland to Europe and the United States.

Icelandair shares gained 3.14 per cent to 9.85 Icelandic crowns.

Ryanair earlier denied speculation it was considering a bid for easyJet.

"Hell will freeze over first," a Ryanair spokeswoman said.

EasyJet founder Mr Stelios Haji-Ioannou has also repeatedly denied he is considering taking the airline private. - (Reuters)