The government is taking a tougher stance after allowing the airline to operate for months without paying salaries, although it has stopped short of forcing a closure of the heavily indebted carrier. Kingfisher has debt of $1.4 billion, owed mostly to government-controlled banks including State Bank of India, the country's top lender.

The airline, controlled by liquor baron Vijay Mallya, won't get the government's approval to resume flying before it pays staff salaries and submits an acceptable recovery plan, a senior official at the aviation regulator told reporters on Tuesday, declining to be identified as the negotiations are private.

Unhappiness among the rank and file came to a head over the weekend when technicians and engineers staged a protest that the airline said turned violent. Kingfisher has halted all flights since Monday due to the labour unrest and said it will decide on Thursday whether to lift a partial lockout of staff on Friday.

"This is going to last for a long time," said Sharan Lillaney, an aviation analyst at Angel Broking in Mumbai.

The airline loses 40 million rupees a day if it flies and twice that if it doesn't, according to a senior government source. The airline declined to comment on its daily losses.

While shutting down saves the embattled airline money, the grounding of its fleet deals a further blow to its ability to win back passengers should it resume operations.

"Even if they start, nobody is going to buy their tickets now. People cannot afford inconvenience at such a time when there are other options available with similar service and at the same price," Lillaney said.

Shares in Kingfisher were down 4.9 percent on Wednesday, after slumping nearly 5 percent - their daily limit - in each of the previous two sessions.

NO PROFIT

Kingfisher, which as recently as last year was India's No.2 airline by market share, has never earned a profit since it was founded in 2005 and has defaulted on payments to airports and oil companies.

Kingfisher has been scrambling to find investors. While it has said it is in talks with global airlines for a potential investment, nothing has materialised and no airline has publicly expressed interest in investing in it.

Its banks have refused to lend it more without an additional funding infusion.

"As far as we are concerned this is something which is not entirely shocking or unanticipated," S. Vishvanathan, deputy managing director at State Bank of India, the airline's lead lender, told Reuters on Wednesday.

"We have known that Kingfisher is having increasing problems. So the final solution hinges on how the capital will be infused, how the cash flow will improve," he said.

The latest crisis at the ailing carrier started when disgruntled engineers responsible for aircraft safety checks threatened other employees reporting to work.

Before the shutdown, Kingfisher was operating just 10 planes out of a fleet that once numbered 64, according to the regulator.

According to Indian rules, an airline has to fly at least 5 planes to retain its status as a scheduled carrier. (Additional reporting by Swati Pandey in MUMBAI; Editing by Tony Munroe and Ryan Woo)

• A Permanent Economic Emergency