Cyprus Airways, which is government controlled, was offered state assistance totalling 103 million euros over different occasions in 2012 and early 2013, prompting an investigation by the European Commission.
"Any decision rendering that assistance illegal means the company would have to return the money there will be no choice but to suspend its operation," Transport minister Marios Demetriades told reporters.
The airline, which has struggled against cheaper competitors for years and failed in attempts to turn round its fortunes, was at a "tipping point", Demetriades said.
The aid plans were offered by the Cypriot government of the time, which later lost power to incumbent conservatives in 2013.
Under state aid rules, a company in difficulty can receive rescue and restructuring aid once every ten years.
Cyprus Airways, which recently resorted to selling assets such as its slot at London Heathrow to stay afloat, previously got financial assistance in 2007.
It has been making losses for years, and last week the Cyprus Stock Exchange said it would be delisting its share from Jan. 13 for failing to submit financial statements from 2012 onwards.
Attempts to sell Cyprus Airways flopped last year. European low-budget airline Ryanair and Greece's Aegean Airlines had expressed some preliminary interest but it was not followed up with anything firmer.
Both Ryanair and Aegean, which have taken market share away from Cyprus Airways, have submitted applications to Cypriot authorities seeking an air operator certificate, which would allow them to create subsidiaries on the island.