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UPDATE 1-Future of Air Berlin's Niki uncertain as Lufthansa begins talks

* Lufthansa seen as a frontrunner among potential bidders

* Labour bosses say Niki's August wages will be 'litmus test'

* Unclear whether Niki to be sold in separate deal

* Transport minister says won't abandon Niki (Adds detail, competition watchdog, background)

VIENNA, Aug 18 (Reuters) - Austrian holiday airline Niki's 850 employees were braced for a bumpy ride as insolvent parent Air Berlin began talks on Friday to sell off its assets before it runs out of cash.

German flagship carrier Lufthansa was scheduled to be first at the table ahead of other potential bidders, a senior labour union official told Reuters on Thursday amid reports that it was interested in taking over Niki.

However, Niki labour bosses said on Friday that the brand's future was unclear and it was not known whether the Austrian carrier would be sold separately or as part of a package.

Union representative Peter Stattmann told journalists that all bills at Niki had been paid so far but that the next "litmus test" would be August wages in the two-digit millions of euros, due at the end of the month.

"We were promised (these wages). We will see if it will happen that way," Stattmann said after a staff meeting at Vienna Airport.

Lufthansa, which already owns Austrian Airlines, could run into opposition from antitrust regulators if it took over a major portion of Air Berlin's assets. Rival Ryanair has already filed a complaint with German and European Union competition authorities over the handling of Air Berlin's insolvency process.

Theodor Thanner, chief of Austria's BWB competition watchdog, told broadcaster ORF that one condition for Lufthansa buying Niki might be that the merged entity be banned from servicing certain routes where Lufthansa already dominates.

PAYING THE BILLS

The pressure is on to complete talks quickly because a 150 million euro ($176 million) bridging loan Air Berlin received from the German government will only keep its planes flying for up to three months.

Asked whether wages at Niki -- which is not part of the insolvency proceedings and the employees of which are paid less than those in Germany -- could be paid out of that pot, works council chief Stefan Tankovits said that would be decided by management and lawyers.

"At the moment management has promised that liquidity will be provided ... But naturally one cannot rule out anything, we are prepared for everything," Tankovits said when asked whether he was worried that Niki could run out of money.

He said there were no signs that Etihad Airways, which had initially agreed to buy Niki from Air Berlin, would step in.

Workers' representatives said they hoped that the Austrian government, which like the German government faces elections in autumn, would rescue jobs and bring holidaymakers home in a worst-case scenario.

"We are already in touch," Stattmann said.

Austria's transport minister said the government would seek a solution if Niki faced insolvency itself. "We won't leave anyone out in the cold," Joerg Leichtfried said. ($1 = 0.8518 euros)

(Editing by David Goodman)