The alliance as proposed "would likely result in higher air fares and reduced service," the department said.
American had sought antitrust immunity to form a marketing alliance with British Airways. Such an alliance would let the carriers set fares and routes and sell each other's tickets.
The Justice Department said in a statement that it planned to oppose the alliance unless the Transportation Department, which must approve or reject the deal, required the airlines to give up flights so that competitors could offer round trip service to London from New York and Boston.
The airlines said making them give up flights was "inappropriate."
The department "underestimated the commercial availability of slots at (London's) Heathrow (Airport) and the competitive advantages already being enjoyed by other global alliance networks," the airlines said in a joint statement. "Most significantly, DOJ did not consider the potential benefits of a new U.S.-U.K. open skies agreement."
The airlines added that it was ultimately up to the Transportation Department to approve the alliance and said they would take their case against giving up flights to the agency this week.
American and British Airways currently compete head-to-head in the market for nonstop flights to London from several major U.S. cities. The alliance would give them over 50 percent of the flights in many markets and an even higher share of the business travel market, the statement said.
The Justice Department favors a new treaty for air service between the United States and the United Kingdom that would remove government restrictions on entry and pricing. In a statement, the Justice Department suggested that the Transportation Department should make takeoff and landing slots at London's tightly constrained Heathrow Airport available to other airlines.
"This proceeding offers an opportunity to transform a market that has been severely restricted for decades into one where significant new entry can occur," said R. Hewitt Pate, deputy assistant attorney general in the department's Antitrust Division.
"If DOT can secure meaningful access to Heathrow for new entrants, consumers will enjoy more choices for trans-Atlantic travel from more U.S. cities at lower prices," the statement said.
The Justice Department blocked a similar alliance request that American made in 1996.
In arguing for the new proposal, American executives said the airline industry had changed greatly in five years, with trans-Atlantic travel less concentrated at London's Heathrow, where British Airways operates a hub.
American, based, in Fort Worth, Texas, also said its request was no different from a Northwest agreement with KLM of the Netherlands, giving the two carriers a trans-Atlantic hub in Amsterdam, or the United-Lufthansa alliance that perates through Frankfurt. Both deals received antitrust immunity. Also, Delta is trying to form an alliance with Air France.
Delta, Continental and Northwest opposed the new proposal, saying it would let American and British Airways dominate London-to-U.S. routes.
Earlier this month, the Transportation Department rejected a request by the three airlines for court review of their claims that the alliance would be anticompetitive and hurt consumers.
By Karen Gullo © MMI The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed