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UPDATE 2-Employee unrest hits flights at India's Kingfisher Airlines

(Adds details, comment from regulator, passenger)

By Anurag Kotoky

NEW DELHI, Oct 1 (Reuters) - Labour unrest forced India's ailing Kingfisher Airlines Ltd to cancel flights on Monday, the latest blow for a carrier scrambling to find an investor and sending its shares down by their daily limit of 5 percent.

Kingfisher said it was cancelling several flights, but a top official at the aviation regulator told Reuters that no Kingfisher flights were operating as of midday on Monday.

Kingfisher, controlled by liquor baron Vijay Mallya, had already grounded most of its fleet as of earlier this year.

"A section of employees of Kingfisher Airlines has not been reporting for work over the last fortnight and over the past two days, they have been threatening and even manhandling the other employees who are reporting for work," Kingfisher spokesman Prakash Mirpuri said in a statement on Monday.

All Kingfisher flights scheduled to depart from the Delhi airport until 4:30 p.m. (1100 GMT) had been cancelled, the airport's website showed.

"We are considering, examining the whole situation," Arun Mishra, the Director General of Civil Aviation, told Reuters.

Under Indian rules, an airline needs to operate at least five planes in order to maintain its licence.

Kingfisher, which has been months behind on salary payments, has seen its operations disrupted several times by fed-up employees, although until the recent incident there had not apparently been any reports of violence.

The Mint newspaper reported that the airline's ground staff had refused to attach an air bridge to a plane in Mumbai on Sunday, stranding passengers onboard, while some engineers "beat up" an executive, the newspaper said, citing two unnamed sources.

Mirpuri did not reply to phones calls and text messages. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Kingfisher: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Kingfisher is saddled with $1.4 billion debt and banks have refused to lend it more unless it can infuse fresh funds into the airline. The carrier, which has never turned a profit, has seen its domestic market share fall from second place last year to last among India's six main carriers.

"I must have been crazy to have booked tickets on Kingfisher. I don't know what to do now," Bilal Ahmed, 29, who is due to be married on Wednesday in Srinagar, told Reuters at Delhi airport, where his flight had been cancelled.

Last week, its banks held inconclusive talks about the carrier's turnaround plan and will meet again this month.

Last month, India allowed foreign airlines to buy stakes of up to 49 percent in local carriers, a long-awaited policy move lobbied for by Kingfisher and seen as providing a lifeline to the country's debt-laden operators.

While no carrier has publicly expressed interest in buying a stake in Kingfisher, Mallya told shareholders last week he was in talks with foreign carriers for investments, echoing earlier comments about potential investments, which have yet to yield any announcement.

Kingfisher shares were down 4.95 percent at 15.35 rupees as of 9:50 a.m. (0420 GMT) on the National Stock Exchange. The stock has risen sharply on funding hopes after hitting a life-time low of 7.05 rupees in mid-August.

Last week, India's two main bourses cut to 5 percent from 20 percent the maximum allowable move of Kingfisher shares, which have been volatile.

Also last week, Mallya's United Spirits Ltd and Diageo Plc confirmed long-rumoured talks for the UK giant to take a stake in India's dominant whisky maker, a deal that could make it easier for Mallya to find funds to rescue Kingfisher.

(Additional reporting by Mansi Thapliyal; Editing by Chris Gallagher and Tony Munroe)

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Keywords: INDIA KINGFISHER/