The regional airline Aer Arann last night expressed interest in taking over State contracts to operate air services linking Dublin with Sligo and Donegal.

Aer Arann lost the contracts last year to rival Euroceltic, which ceased operations on Tuesday when the British authorities revoked its licence. While the Department of Transport said it was reviewing the situation, it was unclear last night whether a new tender process would be required to allocate any new public service obligation contract.

Worth €7 million a year, the contracts provide a State subsidy to ensure the provision of what would otherwise be a loss-making service. Aer Arann's spokesman said it was waiting for a decision from the Department of Transport in relation to the contracts.

The airline also confirmed it was negotiating with the Waterford airport authority on the possibility of introducing a service linking the city with Luton. This would replace a Euroceltic service that was not subject to a public service contract. "We are looking at a number of opportunities but are not in a position to comment on these at present," said Aer Arann's spokesman.

This was confirmed by chairman of Waterford airport, Mr Nicholas Fewer, who said: "The board has been in negotiations with Aer Arann for the past six weeks about providing a service out of Waterford and we hope to be able to make a positive announcement in this regard shortly."

While a British Civil Aviation Authority spokeswoman insisted early yesterday that it had not revoked Euroceltic's aircraft operation certification, the airline's managing director Mr Mike Johnson said he had received a letter dated yesterday confirming the revocation.

He said the licence was revoked because the airline had been operating only leased planes since a non-fatal accident in Sligo last November. Euroceltic's registration in Britain, where airlines are obliged to operate at least one plane they own, meant that it did not require an Irish registration.

Mr Johnson said ticket-holders could secure refunds by contacting Euroceltic's reservation desks in Sligo, Donegal and Waterford, which will be attended by staff for the next four or five days.

The manager of Sligo Airport, Mr Joe Corcoran, yesterday said he was confident the Dublin service would be revived. "At present there's absolutely no danger to any jobs," he said.

Up to 50 passengers who had checked in were transported by road to Dublin at the airport's expense. Mr Corcoran said the airport had been unhappy that Euroceltic had won the public service contract because it found the original Aer Arann service satisfactory. "Why were Sligo and Donegal singled out and given to Euroceltic? We had a very good service from Aer Arann."

Meanwhile, Mr Fewer of Waterford airport denied reports that its search and rescue service would be transferred. Citing contact with the Department of Communications, he said there was "no question of relocation of the service".