The Hungarian national airline, Malev, has grounded its fleet after running out of money.
The development comes a month after the EU said it must pay back millions of euro of state aid received between 2007 and 2010.
All flights were cancelled from 6am.
A Malev plane at Dublin airport is one of only two of the carrier's planes that are grounded abroad.
Prime Minister Viktor Orban confirmed on state radio that two Malev planes - one in Tel Aviv, the other in Ireland - were not allowed to take off because of the airline's accumulated debts.
However, the Hungarian government has put a guarantee in place to ensure people who have bookings with the airline will be compensated for three days after the closure.
Yesterday, the government had warned it was preparing for a possible grounding of all flights.
The Development Ministry said in a statement that the airline, which accounts for 40% of annual turnover at Budapest's international airport, was placed under extraordinary protection from creditors.
"Counterparties cannot void or walk away from prior agreements entered into with Malev. The validity of the airline's official licences are automatically extended," the ministry added.
In 2010, Hungary bought back all but a 5% stake in the carrier, which employs 2,600 people.
It posted a massive loss in 2010 after failed privatisation attempts.
Today, Ryanair confirmed it will operate 31 new routes from Budapest to deal with the closure.
Starting from two weeks' time, it said it will deliver up to 2m passengers a year, "replacing most of the traffic and routes lost by Budapest following last night’s grounding of Malev".