Vijay Mallya, the flamboyant liquor baron who owns a majority stake in Kingfisher, said he was determined to keep the airline flying and blamed a cash crunch on the tax authorities who have frozen its bank accounts over outstanding dues.

"I am absolutely committed to keeping the airline going unless some government agency wishes to ground it," Mallya told reporters. "The point is our banks accounts have been frozen by income tax authorities very suddenly and that has crippled us."

Kingfisher shares plunged nearly 20 percent in early trade on Tuesday ahead of a meeting between the airline's top executives and the country's aviation regulator. The Directorate General of Civil Aviation (DGCA) has asked the carrier to explain the cancellation more than 100 flights since Saturday.

Of the 64 planes in its fleet, Kingfisher is using just over a dozen to operate flights currently, stranding thousands of passengers at airports across the country.

With one of the world's most expensive yachts and a cricket and Formula One team, Kingfisher Airlines' billionaire chairman is known as the "King of the Good Times" for a jet-set lifestyle that has shadowed India's own rise as an economic power.

The 56-year-old Mallya is also chairman of United Breweries (Holdings) (UBHL.NS), a conglomerate with interests as diverse as aviation, breweries, biotechnology and real estate. The group has annual sales of more than $4 billion.

CUT-THROAT COMPETITION

But his airline - named after his famous brand of Indian beer - has become one of the main casualties of high fuel costs and a fierce price war between a handful of budget carriers which, between them, ordered hundreds of aircraft for delivery over the next decade in an ambitious bet on the future.

The Mint newspaper, citing a government official, said Kingfisher will return two Airbus A320s to lessors this month due to payment defaults. A Kingfisher Airlines spokesman did not respond to calls by Reuters for comment.

Other media reports said that 50 Kingfisher commanders have resigned over the past week, taking to more than 300 the number of pilots who have quit since last September.

"A panic button has already been pressed," one Kingfisher Airlines senior pilot told Reuters. "Everyone is looking out for opportunities. Resignations are unlikely to stop."

Rising jet fuel prices and cut-throat fare competition have taken their toll across the Indian airline industry despite passenger growth of nearly 20 percent last year.

Five out of six major carrier are losing money and analysts estimate that the industry overall is on course to lose $3 billion for the year ending next month.

Kingfisher, which until this year was India's second-largest airline, has not turned a profit since it was founded in 2005 and is carrying a debt burden of $1.3 billion.

Its revenue has been in decline since the end of last year and now, strapped for cash, it has resorted to cancelling flights. Staff are not being paid and tax bills remain outstanding -- adding a further $477 million to what it owes, according to Kotak Institutional Equities.

Shares in Kingfisher have dropped 63 percent since the start of last year, shrinking its market value to $269 million.

STRAPPED FOR CASH

The airline's banks, which took a 29 percent stake in an earlier debt-for-equity swap, are unwilling to restructure their loans further until fresh equity is found.

Mallya blames that on government policy, which is now debating a proposal to allow foreign airlines to acquire up to a 49 percent stake in domestic airlines but for now bars foreign direct investment in Indian carriers.

"We have been requesting working capital from our consortium of bankers for a long time but the consortium of bankers took the view that the government policy was not favorable to the industry," he said.

Lenders met last week to discuss a proposal from SBI Capital Markets, the investment banking arm of State Bank of India, to extend lines of credit to the beleaguered carrier.

"Whatever we have been seeing in the media in the last two days has only added fuel to fire," said a senior official at state lender Bank of Baroda (BOB.NS), which has loans of more than 5 billion rupees to Kingfisher Airlines.

"We want to recover our money but we need to figure out how," added the official, who asked not to be named.

The government has resisted calls for it to rescue Kingfisher Airlines and Mallya's UB Group has said it won't use its overseas alcohol assets to raise funds for the airline.

"There is a feeling that Vijay Mallya doesn't want to invest his money in Kingfisher," said the senior pilot. "Why else would someone as rich as him want to delay staff salaries for months? He only wants to raise money from the market, not invest his own money."

(Writing by John Chalmers; Reporting by Sumeet Chatterjee and Swati Pandey in Mumbai and Sanjeev Choudhary in New Delhi; Editing by Jonathan Thatcher)

• A Permanent Economic Emergency