The European Commission said last week it had "deep competition concerns" about Lufthana's hoped-for buyout of 81 aircraft from Air Berlin's 140-strong fleet plus Niki for 210 million euros ($250 million).
After Lufthansa's planned acquisition of Niki fell through and no other buyer could be found at short notice, Niki filed a petition to open insolvency proceedings with the a court in Berlin-Charlottenburg, it added.
Lufthansa is proposing that takeoff and landing slots from Air Berlin's Niki division be handed to TUIfly and Thomas Cook's German arm Condor as part of a package of remedies to be lodged with the European Commission, according to the people, who asked not to be named as the details are private.
The EU Commission on Wednesday defended its action in a statement, saying its role was to make sure that mergers didn't make consumers worse off.
The UK-based budget airline is also planning to recruit around 1,000 Air Berlin pilots and cabin crew over the coming months, to be employed on German contracts. The Commission said it would now limit its review to LGW.
Lufthansa had already offered to give up numerous precious takeoff and landing slots it originally wanted under the deal.
Air Berlin, which was Germany's second-biggest airline, ended operations in late October. Those included some of the slots belonging to LG Walter, an Air Berlin subsidiary.
Several Niki flights scheduled for Thursday have been cancelled but those cancellations were long-standing and unrelated to any insolvency, a Vienna Airport spokesman said.
Lufthansa said it had offered to give up slots but the Commission "considers this to be insufficient" and clearly indicated that it wouldn't now approve the acquisition of Niki.
Niki Lauda said he was interested in buying the airline back.