The heavily indebted airline, which has been months behind on salary payments, saw its operations come to a grinding halt on Monday after disgruntled engineers responsible for aircraft safety checks threatened other employees reporting to work.

While protests by frustrated Kingfisher employees and flight cancellations are not new, the latest episode will undermine confidence about the airline's viability at a time when the former No.2 carrier by market share is seeking fresh funds to stay aloft.

"Right now the best thing for Mallya would be to close the airline completely, get his act together, make a restructuring plan, see where he can money to invest in it, negotiate with foreign investors and then come out with a brand new plan of action in front of him," said Rajan Mehra, the India head of U.S.-based private jet operator Universal Aviation, and an aviation expert.

Kingfisher is struggling under a $1.4 billion debt load after borrowing heavily to expand its fleet. Banks have refused to lend Kingfisher more money unless it can secure new capital from investors.

As of February, State Bank of India, the country's top lender, had an exposure of 14.08 billion rupees to Kingfisher. No. 2 state-run lender Punjab National Bank was owed 7.04 billion rupees, while IDBI Bank Ltd had an exposure of 6.96 billion rupees.

Kingfisher is in talks with a couple of airlines for investment and hoped discussions would conclude in three months, the aviation regulator said on Tuesday.

Last month, India allowed foreign airlines to buy stakes of up to 49 percent in local carriers, a long-awaited policy move lobbied for by Kingfisher and seen as providing a lifeline to the country's debt-laden operators.

'WILLING TO WORK'

"We just need relief for our families. Even if they clear salaries for a couple of months, we will be willing to work," said a Mumbai-based senior ground staff.

"We are loyal to the company. That is why we stayed on despite all the issues."

Kingfisher is in talks with employees and will make a call on lifting the partial lockout on Thursday, Chief Executive Sanjay Aggarwal told reporters after a meeting with the country's aviation regulator on Tuesday.

The airline said it plans to use 600 million rupees in frozen bank accounts to pay employee salaries.

"There is no permanent grounding," said Prakash Mirpuri, a Kingfisher spokesman. "We have every intention to restart our operations in a few days after we sort out our employee discipline issues."

The aviation regulator said the airline would require its nod to restart operations.

The regulator warned on Monday that it would not allow Kingfisher to fly if safety rules were violated.

Kingfisher, which has never made a profit since its inception in 2005, had already grounded most of its fleet.

Shares in Kingfisher fell 4.95 percent, their daily limit, to 15.35 rupees on Monday. Markets are closed on Tuesday for a local holiday. (Additional reporting by Nandita Bose and Himank Sharma in MUMBAI, Andy Mukherjee in SINGAPORE; Editing by Ryan Woo)

• A Permanent Economic Emergency