The German government said it regrets the EU's stance and will do everything it can to limit the damage to taxpayers.
The commissioner in charge of competition policy, Margrethe Vestager, said Tuesday that Easyjet's plans will not reduce competition. "This will hit employees especially hard".
If Lufthansa's purchase of LGW can proceed the price will be around 18 million euros ($22 million), Air Berlin said, compared to a previous price of 210 million euros for the deal including Niki.
A halt to Niki's services would add to Christmas-season air-travel disruptions across Europe, after United Kingdom leisure carrier Monarch Airlines folded in October.
The Austrian government said it will make sure that Niki passengers stranded overseas will be brought home, for instance by chartering planes from other airlines, a spokesman for acting transport minister Joerg Leichtfried said by telephone.
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They also said the country isn't the accepted leader in human space exploration any longer, but "should be a leader in space". He said the directive turns the focus of the nation's space program to "human exploration and discovery".
Lufthansa says the Commission sees these concessions as "unsatisfactory and signaled clearly that it could not allow taking over and integrating Niki" into Lufthansa's low-priced subsidiary, Eurowings.
Niki Lauda said he was interested in buying the airline back.
"Lufthansa informed Air Berlin and its insolvency managers that it will pursue the planned transaction without the purchase of Niki", Lufthansa said in a statement.
Furthermore, Niki would lose their highly-prized starting and landing rights at German airports.
Air Berlin said separately that it's still looking at alternatives for the unit.
The EU said it will continue to review Lufthansa's takeover of LGW.
German flag carrier Lufthansa said Wednesday it was abandoning its efforts to acquire Niki, citing persistent objections by European Union antitrust regulators against a possible tie-up between the two airlines.