Members of the Scott Trust, the charitable foundation that owns the newspaper discussed the plan in early July, according to a report in the Sunday Times newspaper.
They were also reportedly shown trial copies of an Observer weekly news magazine that could replace the Sunday title.
Citing sources at The Observer, the report adds that GMG, led by Carolyn McCall (pictured) have decided to put the plans on hold while an alternative to scrapping the paper completely is worked out.
Last week, GMG which owns newspaper business Guardian News & Media (GNM) and radio business GMG Radio, reported a pre-tax loss of £89.8m for the year to the end of March as the recession bit across all its divisions.
GNM posted an operating loss of £36.8m compared to a loss £26.4M in 2008 on turnover down from £261.9m to £253.6m.
GNM had no comment to make on speculation surrounding The Observer. The group bought the newspaper in 1993.