* Austrian court agrees insolvency should be handled there
* Insolvency process may have to start from scratch
* New administrator to look at alternatives to IAG deal (Adds Austrian and German administrators, IAG, background)
By Kirsti Knolle and Shadia Nasralla
VIENNA, Jan 12 (Reuters) - Airline Niki's sale to British Airways parent IAG was thrown into further doubt on Friday when a battle between Austrian and German officials over who should handle its insolvency proceedings intensified.
Niki filed for insolvency in Berlin last month after Germany's Lufthansa scrapped plans to buy the Austrian arm of insolvent Air Berlin.
After hurried talks to find a new owner for Niki before it lost its valuable runway slots, IAG agreed to buy the business and make it part of low-cost unit Vueling.
However, the deal was put at risk after a German court said this week that Niki was not under German jurisdiction.
An Austrian court in the town of Korneuburg on Friday approved a request by passengers' rights group Fairplane, which argued that as Niki is registered in Austria the case should be handled there.
Fairplane also saw a conflict of interest in appointing the same administrators for Niki and its German parent and debtor Air Berlin.
"The main proceedings will take place in Austria," a Korneuburg court spokesman said on Friday. According to national law, the case has to start from scratch after the ruling.
Niki's newly appointed Austrian administrator Ulla Reisch said she would cooperate with her German counterpart and aimed to find a solution for the carrier within three weeks.
"We will not start from the beginning as if there had never been proceedings in this case," Reisch told Reuters, adding that she will consider the IAG deal but was also open for new deals if they were better.
"I think a solution can be found within two to three weeks," Reisch said.
German administrator Lucas Floether, however, said he was considering legal action against the neighbouring country's court decision, having already agreed the deal with IAG.
"The opening of this case contradicts European insolvency regulation," he said in a statement.
IAG, which had committed to pay the January salaries for Niki staff, said it was monitoring the situation.
Niki owes 153 million euros to around 200 creditors, according to Austria's creditors body KSV 1870.
Fairplane, which said it has claims of 1.2 million euros against Niki for 3,000 passengers, welcomed the Austrian court's decision.
"This is an important decision to minimize damage at Niki and to safeguard passengers rights," Fairplane said in a statement. (additional reporting by Alistair Smout in London, editing by Georgina Prodhan and Keith Weir)