UPDATE 4-UK defends throwing Flybe a lifeline after rivals complain

* IAG files complaint with the EU over Flybe rescue

* PM's spokesman says govt help has not broken state aid
rules

* Details of UK support for Flybe have not been made public

* Rival airlines say Flybe's owners should foot the bill
(Recasts with PM's spokesman comments)

By Sarah Young

LONDON, Jan 15 (Reuters) - The British government defended a
rescue deal for privately owned regional airline Flybe, after
the owner of rival British Airways filed a complaint with
European Union regulators on Wednesday calling it a "blatant
misuse of public funds".

A spokesman for Prime Minister Boris Johnson dismissed the
claims made by Willie Walsh, the boss of BA's parent company IAG
, that government help for Flybe contradicted European
Union rules.

"The government is fully compliant with state aid rules and
there has been no state aid for Flybe," the spokesman told
reporters on Wednesday.

Flybe was kept afloat on Tuesday after its shareholders
agreed to invest more money alongside a UK government support
plan, reported to involve the deferral of a tax bill and a
potential government loan.

Johnson's spokesman said that the government stepped in to
retain transport links between UK regions and any support that
is given "would be made on strictly commercial terms". Many
details of the plan have not been made public.

Flybe connects smaller UK cities such as Southampton and
Newcastle and boosting transport links outside London was one of
the promises made by the Conservative government.

But Flybe's competitors attacked what they said was
government backing for Flybe, arguing that it was no longer a
level playing field.

Walsh said the taxpayer was picking up the tab for Flybe's
mismanagement. "This is a blatant misuse of public funds," he
said in an emailed statement.

IAG, whose airlines BA and Aer Lingus compete with Flybe,
took its complaint to the European Union's Directorate-General
for Competition and asked it to look into whether support for
Flybe constituted a breach of EU state aid rules.

OLD FOES

Walsh and other critics of the Flybe bailout have suggested
the carrier's ultimate owners, which include British Airways'
(BA) old rival Virgin Atlantic, had deep enough pockets to
ensure the airline's survival without government help.

Rivalry between Virgin Atlantic and BA dates back more than
20 years to when Virgin accused BA of conducting a smear
campaign.

Virgin Atlantic is 51% owned by Richard Branson's Virgin
Group with the balance held by another BA rival, Delta,
the second biggest U.S. airline by passenger numbers with a
market capitalisation of $40 billion.

EasyJet CEO Johan Lundgren said it was hard to comment given
the lack of detail about Flybe's support package, but added:
"Taxpayers should not be used to bail out individual companies
especially when they are backed by well-funded businesses."

Despite their criticism, both British Airways and easyJet
could benefit from one part of the Flybe rescue plan - the
government's decision to review air passenger duty, a tax on
flights departing from UK airports.

Governments are permitted to provide state aid under EU
rules, but only with approval from the European Commission. The
Commission said on Wednesday it was willing to discuss Flybe
with the UK government.

While Britain is set to leave the EU on Jan. 31, it will
then move into a nearly year-long transition phase during which
it will continue to abide by EU rules.

Across the EU, airlines have historically been big
recipients of state aid. Carriers such as Belgium's Sabena
received contested bailouts for years before eventually being
allowed to go bust.

Italy has promised another 400 million euros ($446
million)to Alitalia even as the EU continues to investigate its
last 900 million euro loan. And when Thomas Cook collapsed last
September, Germany kept its Condor subsidiary afloat with a 380
million euro rescue loan that won swift approval from Brussels.
(Reporting by Sarah Young and Elizabeth Piper; additional
reporting by Kate Holton, Estelle Shirbon, Laurence Frost and
Conor Humphries, editing by Mark Potter and Elaine Hardcastle)