"Skyways Express AB with its daughter company City Airline AB have today been forced to stop all payments," the company said in a statement issued on the company's website.
"As a consequence all flights have also been cancelled with immediate effect. Both companies will apply for bankruptcy in the morning."
The airline advised passengers with reservations on flights scheduled to depart on Tuesday to avoid going to the airport, as there are no longer any scheduled Skyways departures.
The airlines flew to around 20 destinations mainly in Sweden, but also serviced a number of European cities, including Helsinki, Copenhagen, Prague, Riga, Tallinn, Kiev, Birmingham, Manchester, Lyon and Zurich
The company explained that Skyway's owners "decided not to fund the company any longer", prompting the decision to suspend all payments and cancel all flights.
“It feels very sad for the company and for our passengers that will be immediately affected. It is also very sad for the personnel also at risk to lose their jobs," Skyways CEO Mikael Wångdahl said in a statement.
Sweden's main airport Arlanda alone had 31 cancelled flights Tuesday due to the bankruptcy, and Swedish public radio reported that some 12,000 people held tickets for scrapped flights.
Around 350 pilots, flight attendants and ground personnel were at risk of losing their jobs, it reported.
"I was supposed to fly to Stockholm with Skyways but was told at the check-in at around 6am that Skyways had gone bankrupt and that our plane would not be going to Stockholm," Sven-Åke Svensson told the radio at the airport in central southern town of Jönkoeping.
In neighbouring Denmark the Cimber Sterling airline filed for bankruptcy at the beginning of the month, and according to Swedish public radio, higher fuel prices were likely the main reason the small airlines in the region were going belly-up.