The Civil Aviation Safety Authority has suspended all Tiger Airways flights in Australia for the next week because of "serious" safety concerns.
CASA moved to suspend the budget airline's services after an incident on Thursday night when a Tiger Airways Airbus A320 flew into Avalon Airport, south-west of Melbourne, below the lowest safe altitude.
It is the second time in a month that Tiger has flown below the safety standard.
And in March, Tiger was issued with a show-cause notice over pilot training and maintenance procedures.
CASA says it is the first time it has grounded an airline.
"We've been working with the airline to deal with those issues, but we're not satisfied that they've satisfactorily done that," CASA spokesman Peter Gibson said.
"It's all added together to end up in a situation where the Civil Aviation Safety Authority has said, 'look, we don't have confidence in the ability of Tiger to continue to manage the safety of their operations'.
"Tiger has not been able to, at this stage, convince us that they can continue operations safely, so that's why they're on the ground.
"We believe this is symptomatic of problems within the airline [and] we've put them on the ground while we consider all these issues."
Mr Gibson says the authority is also considering whether or not it needs to go to the Federal Court to extend the grounding.
"That's a decision obviously yet to be made but if do that, obviously we will be seeking a longer period of grounding while we explore these matters further," Mr Gibson said.
He says Tiger can lose its certificate to fly in Australia.
"Ultimately, of course, the airline could lose its air operator's certificate, but of course we've got to work through many steps before we get anywhere near that," he said.
The Australian Transport Safety Bureau also says it is also looking into why the Tiger flight flew below the minimum safe altitude.