* Clear salary backlog before flying again - regulator source
* Situation at 'stalemate' - pilot in command * Shares down around 5 pct for third straight session
(Adds details, comments from staff, background)
By Anurag Kotoky
NEW DELHI, Oct 3 (Reuters) - India's Kingfisher Airlines Ltd , which has cancelled all flights through Thursday, faces a potentially prolonged shutdown until the cash-strapped carrier clears a salary backlog going back half a year.
The government is taking a tougher stance after allowing the airline to operate for months without paying salaries, although it has stopped short of forcing a closure of the heavily indebted carrier. Kingfisher has debt of $1.4 billion, owed mostly to government-controlled banks including State Bank of India , the country's top lender.
"There is a stalemate," Vikrant Patkar, a Mumbai-based pilot in command, told reporters on Wednesday after a meeting with Kingfisher's chief executive and chief operating officers.
"The company has refused to pay us seven months of salary. So we will not let any flight to operate at least from Delhi, Mumbai and Bangalore," he said.
The airline, controlled by liquor baron Vijay Mallya, won't get the government's approval to resume flying before it pays staff salaries and submits an acceptable recovery plan, a senior official at the aviation regulator told reporters on Tuesday, declining to be identified as the negotiations are private.
Unhappiness among the rank and file came to a head over the weekend when technicians and engineers staged a protest that the airline said turned violent. Kingfisher has halted all flights since Monday due to the labour unrest and said it will decide on Thursday whether to lift a partial lockout of staff on Friday.
"This is going to last for a long time," said Sharan Lillaney, an aviation analyst at Angel Broking in Mumbai.
The airline loses 40 million rupees ($760,100) a day if it flies and twice that if it doesn't, a senior government source said. The airline declined to comment on its daily losses.
While shutting down saves the embattled airline money, the grounding of its fleet deals a further blow to its ability to win back passengers should it resume operations.
"Even if they start, nobody is going to buy their tickets now. People cannot afford inconvenience at such a time when there are other options available with similar service and at the same price," Lillaney said.
Kingfisher is now the smallest among India's six main carriers, and its steep decline has enabled rivals such as Jet Airways India Ltd and IndiGo to raise fares in what had been a ferociously competitive market plagued by overcapacity.
On Wednesday, shares in Kingfisher lost nearly 5 percent, their daily limit, for the third straight session.
NO PROFIT, NO PAYCHECK
Kingfisher, which as recently as last year was India's No.2 airline by market share, has never earned a profit since it was founded in 2005. It has also defaulted on payments to banks, airports and oil companies.
Kingfisher plans to use 600 million rupees in bank accounts frozen by authorities to pay staff, the industry regulator said on Tuesday, but it was unclear how it was going to get at those funds. Tax officials froze Kingfisher accounts earlier this year after it failed to deposit taxes deducted from staff.
One senior member of Kingfisher's ground staff, who declined to be named, said the company told employees on Wednesday that they would be paid only for March, not in full.
A Kingfisher spokesman declined to comment.
"As soon as they get some salary, they will move out. How long can you run your house without salary?" the employee said.
Kingfisher is half a year or more behind on salaries. Its employee expenses for the year that ended in March totalled 6.7 billion rupees, although many staff have left since then.
SEARCH FOR SAVIOUR
Kingfisher has been scrambling to find investors. While it has said it is in talks with global airlines for a potential investment, no airline has publicly expressed an interest.
India recently let foreign airlines own up to 49 percent of Indian carriers in a move long lobbied for by Kingfisher.
However, Kingfisher's attractiveness is undermined not just by its debt but by a tough Indian operating environment that saw all but one major carrier lose money last year.
So far, its banks have refused to lend it more money without an additional funding infusion.
"As far as we are concerned this is something which is not entirely shocking or unanticipated," S. Vishvanathan, deputy managing director at State Bank of India, the airline's lead lender, told Reuters on Wednesday.
"We have known that Kingfisher is having increasing problems. So the final solution hinges on how the capital will be infused, how the cash flow will improve," he said.
Big Indian companies rarely fail. Instead, banks typically extend credit to large clients to see them through difficult times, with state lenders especially willing to cut troubled companies slack rather than force a time-consuming liquidation.
But many smaller airlines, including MDLR Airlines, have been grounded in recent years.
The latest crisis at Kingfisher started when disgruntled engineers responsible for aircraft safety checks threatened other employees reporting to work.
Before the shutdown, Kingfisher operated just 10 planes out of a fleet that once numbered 64, the regulator said.
According to Indian rules, an airline has to fly at least 5 planes to retain its status as a scheduled carrier. ($1 = 52.6250 Indian rupees)
(Additional reporting by Kaustubh Kulkarni and Swati Pandey in MUMBAI; Editing by Tony Munroe and Ryan Woo)
Keywords: KINGFISHER SHARES/