Updated from 2:38 p.m. EDT

Shares of

AMR

(AMR)

and

Northwest Airlines

(NWAC)

both rose Wednesday following reports that AMR's

American Airlines

made a $3.7 billion offer for Northwest.

The offer, reported Wednesday in

The Washington Post

and

The Dallas Morning News

, still remains far short of Northwest's initial asking price. Northwest Airlines initially asked for more than $100 a share, more than double the $44 per share offered by American.

Though the

Post

reported that there are indications the airline may be willing to lower its initial price, sources close to the talks say there is still a significant gap in the price asked and offered for the airline.

Nonetheless, investors seemed supportive of the deal, AMR finished up 1 3/16, 4%, at 30 5/8. Northwest closed up 2 1/8, or 6%, at 37 7/8.

Chris Chiames, a spokesman for American Airlines, acknowledged but would not confirm rumors of the potential acquisition. He declined to offer any further comments. Officials at Eagan, Minn.-based Northwest Airlines would not comment on the talks.

In a report released last week,

Brian Harris

, an industry analyst for

Saloman Smith Barney

, estimated the takeover value of Northwest's stock at $55 a share, or $4.7 billion -- $1 billion more than American's reported offer, and about 50% above the price at which Northwest stock has recently been trading. Saloman Smith Barney has helped manage a public offering of AMR stock over the past three years, but does not have an underwriting relationship with Northwest. It maintains a high risk/neutral rating on shares of AMR and a high-risk buy rating on Northwest stock, with a $42-per-share price target for Northwest, midway between the fundamental $30 price and the estimated $55 takeout value.

The two airlines reportedly began

negotiations shortly after the announcement in late May that

UAL's

(UAL) - Get Report

United Airlines

, the country's largest carrier, had agreed to buy

US Airways

(U)

. The news put pressure on other major airlines to pursue similar

arrangements .

UAL's proposed merger is on hold, pending approval by shareholders and federal regulators. In the meantime, other major carriers have been scurrying to seek out potential merger partners before the

U.S. Justice Department

makes a decision on the United-US Airways deal. No. 2 American Airlines, based in Fort Worth, Texas., has held talks with both Northwest and

Delta Airlines

(DAL) - Get Report

.

"American's proposed acquisition of Northwest is in part fueled by its specific aspirations as well as to give the government sufficient ammunition that if it is going to reject one merger it might as well reject all of them," said Julius Maldutis, an airline industry analyst at

CIBC World Markets.

CIBC does not have underwriting relationships with either company. The firm rates both stocks a "buy," with long-term targets of $40 per share for AMR and $45 per share for Northwest, including takeout value.

Though American could benefit from picking up Northwest's northern U.S. and trans-Pacific Asian routes, some industry watchers question both the prospects and the benefits of such a merger.

"Quite honestly, I think it

a merger will be a disaster for both companies," said Helane Becker, an industry analyst at

Buckingham Research Group

. "I understand they feel they have to do something, but they'd be better off if they expanded their own operations internally."

The airlines could also face resistance to the merger from their union employees. Two weeks ago,

AFL-CIO Teamsters

President James Hoffa stirred things up among employees of both airlines when he sent a letter to Northwest Airlines flight attendants opposing the merger and warning that they could lose their seniority rights if the carrier was acquired by American.

"In order to do a successful merger, the airlines have to have reasonably good labor relations and both have horrendous labor relations," Becker said.

In addition, for any proposed deal between American and Northwest to get regulatory approval, Northwest would have to sell off its approximately 14% equity holdings and 51% voting stake in

Continental Airlines

(CAL) - Get Report

. There has been speculation that Delta might be willing to buy Northwest's stake, if it pursues a merger with Continental.