Bangalore-based Deccan will issue new preferential shares to Mallya's UB Group under the terms of an agreement outlined by the airline's chief G.R. Gopinath, who will be executive chairman.

No shareholders' equity will be diluted and no merger will take place between UB Group's Kingfisher Airlines and Deccan Air as a result of the sale, which triggered an open offer from UB Group.

The announcement ends speculation about the future of the four-year-old airline, India's first and largest no-frills carrier. Gopinath had been trying to raise capital to keep it in the skies and fund expansion plans.

It also draws the curtain on a public war of words between Mallya, 51, and Gopinath, 55, who had initially rejected an offer from the liquor tycoon to buy a stake in Air Deccan.

"UB was preferred over other interested investors, due to the inherent synergies existing in Air Deccan and UB's Kingfisher Airlines," Gopinath said at a press conference in Bangalore.

"Air Deccan would continue to operate as an independent airline with increased focus on the low-cost business model," he said. "With commonality of fleet, we foresee sharing of infrastructure, resources and best practices.

"This would definitely lead to decreased costs, maximising shareholder value, increased efficiencies and improved profitability," said Gopinath, a former Indian Army artillery officer.

Air Deccan suffered a loss of 2.13 billion rupees in the quarter ended March, as increased fuel costs and intense competition eroded its profitability, forcing it to scout for an investor.

UB Group paid an advance of 1.5 billion rupees to the airline and will fork out the balance in four weeks, Gopinath said.

The entrepreneur had reacted sharply to Mallya's initial overtures, likening the liquor baron, who this month sealed a deal to buy scotch whisky maker Whyte and Mackay, to a "kid in a toy store" who wants to buy everything in sight.

"I mistook his intention and thought he wanted to buy Air Deccan and convert it into a full-service airline," Gopinath said Thursday.

Mallya, however, had explained that he wanted to put money into the airline as an investor, the entrepreneur added.

Warwick Brady, chief operating officer of Air Deccan, will leave the company to pursue other interests. A new chief executive officer will be named for the airline. Mallya will be vice chairman.

Together, Kingfisher and Air Deccan will have 71 aircraft, cover 70 destinations and command a market share of 33 percent, which will challenge Jet Airways, India's largest carrier.

The deal will speed up consolidation in India's aviation industry, which has posted average annual growth of 20 percent in passenger numbers for the past five years, benefiting from an expanding economy and rising incomes.

Air fares have fallen by more than half during the period under the pressure of competition, squeezing the profitability of an industry that posted a combined loss of 500 million dollars in the year ended March.