Affair? No, it's all in the mind, says Kylie

On holiday with married Chilean film director Alexander Dahm, 39, she beamed as they took a coastal cruise.

Table for two: Kylie dines at sunset with married filmmaker Alexander Dahm, at a resort in Chile

She also giggled as the pair shared a sunset meal in a resort in South America where they have been staying together for a week.

It is just three months since the singer was dumped by her boyfriend Olivier Martinez, who had stood by her while she battled breast cancer.

Friends told the Mail that Kylie, 38, was smitten by Mr Dahm, whose wife is expecting their second child in seven-and-a-half weeks.

One said: "Initially Kylie was telling us that they were just friends.

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Afloat: The singer beams while on a coastal cruise with Dahm

"But her tune has changed. She has been saying he is the most amazing guy she has known since (former boyfriend) Michael Hutchence, which is a very big thing for her to say.

"When we asked if there was anything going on like an affair, she said "Well, what do you mean by an affair?".

Then she said something quite peculiar, she said "sometimes you can have a mental affair."

But Mr Dahm's wife Laura was adamant that the pair were not having an affair.

Speaking from her home in Mexico City, she said: "This romance is not correct. It is not happening. I feel for Kylie - it must be awful to be portrayed as the other woman. They are just friends."

Mrs Dahm, who has a three-year-old son with her husband, said he was flying into Mexico City tonight.

He met Miss Minogue when he was filming the advert for her H&M swimwear range in Mexico, in January.

When asked whether the pair were just friends, the singer's publicist replied: "I do not have a comment to make on that. She is in Chile to do research on a project."

Miss Minogue dated Hutchence, the INXS singer who committed suicide, between 1988 and 1991.