A U.S. bankruptcy judge on Thursday hinted he would approve AMR Corp's bankruptcy exit plan despite the government's challenge to its main component: AMR's planned megamerger with US Airways Group Inc .

At a hearing at U.S. Bankruptcy Court in Manhattan, Judge Sean Lane held off on confirming the plan for American Airlines' bankrupt parent, but said he found "arguments in favor of confirmation to be fairly persuasive."

"I'd like some time to reflect on them," Lane said.

In a lawsuit filed on August 13, the U.S. Department of Justice sought to block the merger on antitrust grounds, alleging it would create too much consolidation and lead to higher fares for consumers.

At an initial hearing on August 15, Lane voiced hesitation to give his blessing to a plan that might change later, namely through a settlement with the DOJ that could include divestitures.

Lane ordered the parties to brief him on the best course of action given the DOJ's concerns. The parties filed those briefs last week, and returned to court on Thursday in hopes of getting Lane to budge.

AMR and its creditors' committee argued that Lane's approval of the plan would not conflict with the DOJ lawsuit, which would need to be resolved before the plan could go into effect, regardless of Lane's ruling.

Any divestitures or settlement terms with the DOJ would also require Lane's approval, the parties argued.

Stephen Karotkin, a lawyer for AMR, said the company's key creditors all favor the plan.

"A good barometer for a plan's feasibility is the vote of creditors," Karotkin said at Thursday's hearing.

Mike Trevino, a spokesman for American Airlines, said the company was "pleased" that the judge "found our arguments ... persuasive," and reaffirmed the company will focus its attention on the DOJ lawsuit and pushing for a November trial date.

If the Justice Department succeeds in blocking the merger it would put AMR's restructuring back at square one, requiring it to forge new strategies for paying back creditors.

AMR shareholders, who stand to receive a 3.5 percent stake in the new entity under the merger, would likely be wiped out under any plan that excludes a merger, restructuring experts say. Most of AMR's key creditors, including its unionized workers, support the tie-up.

Only one constituency voiced opposition to confirmation: a group of plaintiffs in a separate antitrust lawsuit against US Airways. That group argued that the plan is not feasible because of the litigation surrounding it.

The DOJ antitrust suit will take months to resolve, and possibly longer if it goes to trial.

Shares of US Airways, which have fallen since the Justice Department suit, were up 4.6 percent to $16.05. AMR Corp was up 8 percent to $3.30 in over-the-counter trading.

S&P Capital IQ raised its rating on US Airways to "strong buy" from "buy", citing reports the two carriers and the Justice Department were open to settling the government complaint seeking to block the merger.

"We think the merger should not have been blocked, and believe it is feasible that the divestiture of slots at Reagan National will help reach a settlement," equity analyst Jim Corridore said in a note to clients.

(Reporting by Nick Brown; Editing by Lisa Von Ahn and Andrew Hay)