The lawsuit was filed in Cook County Circuit Court in Chicago just days after the two biggest carriers at O'Hare warned Mayor Richard Daley in a letter that proceeding with a nearly $1 billion airport bond sale later this month could lead to litigation.

The airlines asked the court to declare that the city is obligated to obtain airline approval for the $3.36 billion completion phase of the O'Hare Modernization Program. The carriers also want the court to block the city from constructing all or any part of the completion phase.

"These kinds of capital projects require airline scrutiny and approval because they increase airport costs, which the airlines pay for through landing fees and other rates and charges imposed by the city," United and American said in the lawsuit.

The airline industry has been battered severely in the last decade by sagging travel demand, volatile fuel costs and an economic downturn.

"While this severe economic downturn has left the industry as a whole in flux, airlines operating at O'Hare face an even more challenging economic situation," the airlines said in the lawsuit.

In a statement, the Chicago's aviation department said the city believes it has the legal right to continue to move forward to secure funding for O'Hare.

"We remain willing to discuss modernizing O'Hare with the airlines that serve the airport; however, timing is essential. The opportunity to realize the OMP's benefits for the region and national aviation system cannot be lost," the statement said.

In their January 14 letter to the mayor, United and American said the program's continuation is not needed at this time as both airline delays and operations have fallen at O'Hare.

Instead, the carriers said they want to negotiate a construction timetable with the city using agreed-upon operational triggers, similar to a plan used for phase one of the O'Hare Modernization Program.

"We are alarmed at the city's actions to proceed with the issuance of debt for this project without airline approval, which our leases with the city require," the letter said.

A municipal bond market source told Reuters on Tuesday that a $411 million grant receipts and subordinate line passenger facility charge revenue bond sale is scheduled to price next week through Citigroup. Another $587 million of bonds backed by passenger facility charges will be sold the week of January 31 also through Citigroup.

The preliminary official statements for the deals acknowledged the litigation threat by the airlines but stated that the city intends to proceed with the bond sales as it continues discussion with United, American and other carriers.

In their letter, United and American said, while the initial bonds will be paid off with federal grant funds and enplaned passenger charges and not with revenue tied directly to O'Hare carriers, the bonds sale is "inextricably linked to the second debt issuance, which would be backed by airline revenues."

The airlines asked the court to force the city to provide carriers with the city's proposal for the completion phase at least 45 days before issuing general airport revenue bonds, which the airlines fear would increase their costs.

They also want the court to block the city from issuing GARBs to finance the costs of the completion phase unless it has received the prior approval of the phase and its financing from a majority airline coalition.

The carriers want the court to block the city from charging airlines for operation and maintenance expenses related to the completion phase unless it has the coalition's approval. (Reporting by Karen Pierog and Kyle Peterson; Editing by Kenneth Barry)