Icelandic-owned Sterling Airways has cancelled all flights, leaving hundreds of passengers stranded at London Gatwick and thousands stranded across Europe.

The low-cost airline, which flies from Gatwick to Copenhagen, Stockholm and other Scandinavian cities, said it was filling for bankruptcy and blamed the Icelandic financial crisis for its decline.

“Over a three to four week period, the whole financial system melted down, and that resulted in our shareholder being unable to continue his support to the company,” the airline said in a statement.

“Negotiations have been conducted with several potential investors, but it was impossible to make ends meet. The inevitable result is that Sterling Airlines A/S has no option but to file for bankruptcy.”

The airline is owned by Iceland's Northern Travel Holdings and employs around 1,100 staff.

It flew to 40 destinations, mainly from its hubs in Copenhagen, Oslo and Stockholm.

Customers who have directly purchased their tickets on Sterling’s website will not be refunded, even for their return flights.

They will have to book return flights with another airline.

Those who have paid by credit card are advised to contact their bank or credit card company to ask for a possible refund.

Customers who have booked their flights through a travel agency or tour operator should initially contact them.

29 October 2008