The industry regulator told the airline late on Friday to demonstrate why its permit to fly should not be suspended or cancelled, and gave it 15 days to reply.

The Directorate General of Civil Aviation said the airline had failed to establish a "safe, efficient and reliable service".

Kingfisher stopped flights on Monday after a weekend protest by staff turned violent. Airline employees have not been paid for seven months.

"The airline has not been able to resolve its issues. They have not approached DGCA with any operational plan," the ministry of civil aviation said in a statement.

About 150 Kingfisher staff staged a protest march in Mumbai earlier on Friday, following what police said was the suicide of an employee's wife worried about the family's precarious finances. Another 100 staff held a candlelit march in Delhi on Friday night, adding to pressure to resolve the carrier's long-running financial problems.

Kingfisher (KING.NS), once India's second biggest airline, has failed to find an overseas airline or other investors to bring in fresh equity.

The Centre for Asia Pacific Aviation, which estimates Kingfisher's debt at around $2.5 billion, said a fully funded turnaround would cost at least $1 billion. It said Kingfisher had only an outside chance of recovery and that its "massive debt burden, crippled fleet and poor employee morale" would deter a foreign airline investor.

It is now the smallest of India's six main carriers and its steep decline has enabled rivals such as Jet Airways (JET.NS) and IndiGo to raise fares in what had been a ferociously competitive market plagued by overcapacity.

Kingfisher, controlled by liquor baron Vijay Mallya, has never turned a profit since its launch in 2005 and before this week was flying only 10 planes. Its fleet once numbered 64.

"How can the management realistically expect us to work?" said Krishna Kumar, a 35-year-old engineer in Mumbai who joined Kingfisher six years ago. "We have borne this for seven months," said Kumar, wearing a black arm band.

Talks between airline management and Delhi-based pilots and engineers broke down on Thursday. Similar talks in Mumbai on Wednesday ended in what one senior pilot called a stalemate.

Kingfisher spokesman Prakash Mirpuri said the airline was extending what it described as a partial lock-out to October 12 or until the "illegal strike is called off".

TOUGHENED STANCE

The government has been toughening its stance towards Kingfisher after allowing it to operate for months despite grounding most of its fleet and defaulting on payments to banks, oil companies, airports and others.

Kingfisher's lenders, mostly government banks led by State Bank of India (SBI.NS), have refused to extend further credit in the absence of fresh equity, but they have shown patience. Indian state banks rarely force big companies to liquidate.

"Banks are still giving time to Mr. Mallya to get an investor. Because if we pull the plug it would be irretrievable. And if we are patient with him possibly there is a chance that he would revive," SBI Chairman Pratip Chaudhuri told reporters.

"Having waited for so long we might as well wait longer."

Mallya's United Spirits Ltd (UNSP.NS) and Diageo Plc (DGE.L) recently confirmed long-rumoured talks for the UK giant to take a stake in India's dominant whisky maker, which could make it easier for Mallya to find funds to rescue Kingfisher.

Rohan Shrivatsava, 28, who has been with the airline for five years and was part of the protest in Mumbai, said he had been looking for another job without success. "Getting a job after working at Kingfisher is not possible. Do you know how many airline engineers are in the market running for jobs?" he said.

A 31-year-old in Mumbai cargo operations who declined to be identified said he had earned about 18,000 rupees a month in salary and paid 7,000 rupees a month to rent a room.

"My landlord has been furious about my rent dues. I have not paid rent for last three months. How do I pay my rent, where do I live if I am thrown out tomorrow?"

Some employee anger was directed at Mallya, the self-described "King of Good Times", known for his lavish lifestyle.

One placard read: "Is your party over Mr. Mallya?"

Kingfisher shares fell 4.7 percent on Friday, effectively at their daily limit of 5 percent for the fifth straight session. (Additional reporting by Swati Pandey, Kaustubh Kulkarni and Himank Sharma in MUMBAI and Annie Banerji in NEW DELHI; Editing by David Cowell)

• A Permanent Economic Emergency