Germany's second biggest airline, Air Berlin, has filed for bankruptcy protection after key shareholder Etihad Airways withdrew funding.
The move followed years of losses and it leaves valuable runway slots up for grabs.
The move offers Lufthansa and rivals a chance to acquire slots at airports such as Berlin Tegel and Duesseldorf.
Germany's biggest airline is keen to defend its domestic position against expansion by low-cost rival Ryanair.
Lufthansa confirmed it was in talks to take over parts of the business, while a source said easyJet was the second airline referred to by the government as being in talks with Air Berlin.
The British budget carrier declined to comment.
The insolvency comes as thousands of Germans enjoy their summer holidays and just ahead of a September general election.
Berlin has granted a bridging loan of €150 million to allow Air Berlin to keep its planes in the air for three months and secure the jobs of its 7,200 workers in Germany while negotiations continue.
The government said it expected decisions from these negotiations in coming weeks.
Lufthansa has already leased Air Berlin planes to provide flights by its Eurowings budget airline and has made no secret of its interest in taking on more of Air Berlin's business, although debts and anti-trust issues were potential obstacles.
Ryanair said Lufthansa was being set up to take over Air Berlin, which it said would breach competition laws.
But German transport minister Alexander Dobrindt said he was confident there would be no anti-trust issues because the business would be sold off in bits.
Air Berlin, which became famous for its "Mallorca shuttle" services, piled up debt after a series of takeovers and bookings have been hit in recent months by concerns over its finances.
Ryanair complaints over 'conspiracy'
Ryanair has lodged competition complaints with the German Bundeskartellamt and the European Commission over what it says is a conspiracy between the German Government, Lufthansa and Air Berlin to carve up the airline's assets.
It claims this is being done at the exclusion of major competitors and in ignorance of EU competition and State Aid rules.
"Given the fact that the German Government is centrally involved in these manoeuvres, the Bundeskartellamt is likely to struggle to get out of bed. On this basis, and bearing in mind the scale of the market shares and the European implications involved, it is all the more important that the European Commission takes immediate and decisive action," Ryanair said in a statement.
