"This manufactured insolvency is clearly being set up to allow Lufthansa to take over a debt-free Air Berlin, which will be in breach of all known German and European Union competition rules", the Irish airline said.
Plans to merge Niki with TUI AG's German unit in a further restructuring of Air Berlin fell apart in June after Etihad said no agreement had been reached on the joint venture proposal. In recent years it has been kept aloft by Etihad, which holds a 29.2% stake.
Etihad last provided additional funding of 250 million euros to Air Berlin in April.
Air Berlin said that it had applied for insolvency after it was told by Etihad that it was ending financial support after concluding that the Gulf carrier saw "no positive prospects for its continued existence". "We remain open to helping find a commercially viable solution for all parties", the Etihad statement said.
Economy Minister Brigitte Zypries said that the bridge loan should give Air Berlin enough time to wrap up talks on the sale of some operations.
The ministries say "we're in a time when many tens of thousands of travellers and vacationers are in multiple worldwide holiday spots. It's a bad day in the Etihad office, that's for sure, but now that Etihad is arguably free from Air Berlin, it can get back to business as it looks to turn around its losses", he added.
The Irish no-frills airline claimed there was an "obvious conspiracy" playing out between the German government, Lufthansa and Air Berlin, to carve up the latter's assets while excluding competitors.
Irish low-priced airline Ryanair Holdings PLC late Tuesday said it has lodged competition complaints with the German Bundeskartellamt and the European Commission to "block" German airline Deutsche Lufthansa AG from potentially taking over Air Berlin PLC. In May, Italian flag-carrier Alitalia went into bankruptcy proceedings, leaving Etihad sitting on a loss of almost $2 billion. The Federal Government is supporting airberlin with a bridging loan to maintain flight operations for the long-term.
But if you've got a flight booked with the airline, we explain your rights, says Sun Online's Consumer Editor Tara Evans.