Kingfisher Airlines' licence was suspended on Saturday after it failed to address the Indian regulator's concerns about its operations, forcing the debt-laden carrier to stop taking bookings.
Controlled by Vijay Mallya - the self-styled "King of Good Times" - and seven months behind on salary payments among other missed bills, Kingfisher's fleet has been grounded since the start of the month when a staff protest turned violent.
The airline, which has never made a profit since being founded in 2004 and reeling under $1.4 billion of debt, will have its licence reinstated if it provides a plan that satisfies the Directorate General of Civil Aviation (DGCA).
A complete cancellation of the licence was unlikely, said a government source, who declined to be named as he is not permitted to speak to the media.
The company's steep decline has underlined the problems of operating in India's airline sector, where players grappling with rising fuel costs face aggressive pricing caused by overcapacity.
The suspension signalled the regulator's lack of patience with Kingfisher after months of cancelled flights and staff walkouts, and marked a rare tough stance by the government against a high-profile corporate.
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"The actual position is not changed because of this order," Kingfisher said in a statement. "We have, in any case, always maintained that once the issues with the employees are resolved, we will first present our resumption plan to DGCA for review, before resuming operations".
Kingfisher, which had previously suspended all bookings before November 6, said it would cease taking any reservations until operations resumed.
Mallya, a liquor baron who owns a Formula 1 motor-racing team, is famous for lavish parties at his $16 million beachside villa in Goa and also his company's annual swimsuit calendar.
The licence suspension, until further notice, was announced by Arun Mishra, director general at the DGCA.
The move had been widely expected after Kingfisher failed to respond properly to queries from the regulator regarding its ability to provide a "safe, efficient and reliable service".
"The suspension of Kingfisher's licence is unfortunate but not unexpected," Amber Dubey, director, aerospace and defence at KPMG India, said in a statement. "Kingfisher's ability to bounce back from this situation appears challenging."
Kingfisher's woes will likely help rivals such as Indigo and SpiceJet by lowering capacity on key routes.
The airline had said on Friday it expected to begin flying again on November 6 if the government approved its plan to resume operations.
The Centre for Asia Pacific Aviation has said a fully funded turnaround for Kingfisher would cost at least $1 billion.