By Gabriel Araujo and Luciana Magalhaes

SAO PAULO (Reuters) - Brazilian airline Azul is in talks with multiple parties to raise about $400 million in fresh capital via debt financing and an agreement may come as soon as this week, three sources close to the discussions told Reuters.

Azul dominates Brazil's airline industry along with LATAM and Gol. It managed to avoid Chapter 11 even as a number of Latin American carriers filed for bankruptcy after the COVID-19 pandemic, including its two main rivals.

The fresh capital is a condition of Azul's recent deal with lessors to scrap nearly $550 million in obligations in exchange for an equity stake which it undertook in a bid to ease concerns about its debt load and strengthen its cash position.

According to the sources, who requested anonymity to discuss confidential talks, the two options on the table for Azul are a fresh financing accord with its existing ad hoc group of bondholders or receiving capital that investment bank Jefferies has tentatively arranged from additional investors.

An agreement with bondholders could entail a future debt-for-equity swap in addition to a chunk of fresh debt, two of the sources said, while the Jefferies option would be based on the issue of a traditional convertible bond.

Azul declined to comment. Jefferies did not immediately respond to a request for comment.

The carrier told Reuters this month that it was looking to raise capital, potentially using its Azul Cargo unit as collateral, and that it had multiple options to go forward with the transaction.

It was unclear whether a final deal would still include the cargo division as collateral.

Azul has struggled this year with a weaker exchange rate and disastrous flooding in the key market of Porto Alegre.

The recent deal with lessors was contingent on amendments to certain other obligations, including the raising of additional financing.

(Reporting by Gabriel Araujo and Luciana Magalhaes; Editing by Christian Plumb, Kirsten Donovan)