British Airways owner IAG said on Thursday it would not make a new bid for Norwegian Air and would sell its remaining stake in the budget airline, sending Norwegian's shares sharply lower.

Shares in Norwegian, which has been under pressure over the past 18 months to control costs and shore up its balance sheet, dropped as much as 26 percent after IAG's statement to hit their lowest since November 2012.

"International Airlines Group (IAG) confirms that it does not intend to make an offer for Norwegian Air Shuttle ASA and that, in due course, it will be selling its 3.93 percent shareholding in Norwegian," IAG said in a statement.

IAG's shares turned positive after its statement, and were up 1.5 percent at 1305 GMT.

Norwegian, which has shaken up long-haul rivals by offering cut-price transatlantic fares, said in May it had received two conditional proposals for a full takeover from IAG, but had rejected them because they undervalued the company.

IAG CEO Willie Walsh last year ruled out launching a hostile takeover approach for Norwegian, and also said he wouldn't get drawn into a bidding war. In addition to British Airways, IAG also owns Iberia, Vueling and Aer Lingus.

A spokeswoman for IAG declined to give further details on the decision not to pursue Norwegian further, but said "we wish Norwegian every success in the future".

No Margin of Error

"Norwegian's plans and strategy remain unchanged. The company's goal is to continue building a sustainable business to the benefit of its customers, employees and shareholders," Chairman Bjoern Kise said in a statement.

Norwegian has quickly built its long-haul route network, and in October overtook IAG's British Airways as the biggest non-U.S. airline on transatlantic routes to and from the New York area.

But the Nordic carrier has had to take action to improve its financial position in recent months. In December, it announced a US$230 million cost savings program and refinanced one Boeing 787 Dreamliner as part of a series of steps it said would generate more than US$30 million in liquidity.

"Norwegian's finances are already under pressure, and a share sale (by IAG) will put pressure on the stock, making it hard for them to raise money," analyst Per Hansen of brokerage Nordnet said in a note to clients.

"They no longer have any margin of error. If they were to need cash, and no alternative buyers emerge, the stock price could end up looking like a jetliner running out of fuel."