Such a move would act as a major deterrent to private sector participation, sources said adding it would hamper inflow of money as well as technical and operational expertise needed for any kind of investment in civil aviation sector.
"In case the new policy does not allow equity participation by foreign airlines, the sector will not be able to reap the maximum benefits arising from allowing 49 per cent FDI in the sector," the sources said.
However, officials in the Civil Aviation ministry said the issue is not closed and would be taken up for consideration.
The planning commission in its mid-term appraisal and the Naresh Chandra Committee report had, however, favoured allowing equity participation by foreign airlines in domestic air transport operations.