Niki's aircraft have continued to fly as it is not subject to the same bankruptcy conditions as Air Berlin.
"It was clear from the start that Lufthansa and Air Berlin overlap on a very significant number of routes, with clear risks to Austrian, Germans and Swiss consumers and to effective competition", the Commission said.
Easyjet's move to expand its German services follows Air Berlin's collapse in August, which subsequently freed up airport landing slots.
"(From a financial point of view), this leads to a comparable result for the Lufthansa Group", it said.
Meanwhile, the German government has said it expects the insolvency of the airline and the grounding of its planes as a result of Lufthansa's decision. "This will hit employees especially hard".More news: Apple releases iOS 11.2.1 update, fixes a bug in HomeKit
More news: Fit-again Bale leads Real to Club World Cup final
More news: #EndorseThis: On SNL, Santa's Tricky Moment With Savvy Kids
Vestager previously said that, given its dominant position in domestic air travel, Lufthansa might have to give up certain routes in exchange for approval.
The Austrian government said it will make sure that Niki passengers stranded overseas will be brought home, for instance by chartering planes from other airlines, a spokesman for acting transport minister Joerg Leichtfried said by telephone.
"Alternative buyers for Niki were and still are not available, despite all sorts of public announcements and intensive efforts by the chief representative of Air Berlin", it says in a statement.
"Lufthansa informed Air Berlin and its insolvency managers that it will pursue the planned transaction without the purchase of Niki", Lufthansa said in a statement. European Union anti-trust officials already granted their unconditional approval for the sale of a share of Air Berlin to Easy Jet on Tuesday. The carrier didn't specify terms for disposing of the slots, including any airlines that might obtain them. The Commission said it would now limit its review to LGW.
While Lufthansa may thus have been able to cut its related losses on Wednesday, the sudden lack of a buyer for Niki remains highly inconvenient for German policymakers who granted Air Berlin an emergency credit facility of 150 million euros. It has a deadline of December 21 to approve the deal or open a longer investigation.