(Adds details, Lufthansa shares)
BERLIN, Feb 4 (Reuters) - Negotiators for a new grand coalition between Chancellor Angela Merkel's conservatives and Social Democrats may drop a proposal to progressively abolish Germany's air transport tax, a source familiar with the negotiations said on Sunday.
A working paper seen by Reuters on Friday had called for a gradual abolition of the tax, which generates over 1 billion euros for the government each year.
But on Sunday, a source said that proposal could be dropped from the final coalition agreement as negotiators continued to fine-tune the deal and make trade-offs.
The air transport tax is levied on ticket prices and costs between 7 and 40 euros ($9 and $50), depending on the distance flown.
Over half the revenues generated by the tax are paid by German airlines, including Lufthansa, Germany's largest carrier, whose shares turned slightly positive after the initial report about a phase-out on Friday.
The BDL aviation association, which represents the interests of the airline industry, has previously called for the tax to be abolished. (Reporting by Andreas Rinke,; Writing by Andrea Shalal; Editing by Kevin Liffey)