"We've made every effort, myself and my fellow directors, to find new funding for the business - and it's a very sad day for me personally. I am totally devastated," XL chairman Phil Wyatt said.
David Clover, a spokesman for the CAA, said it was making arrangements to help customers of the four tour companies within the XL group.
"In respect of people who are currently abroad, we're making arrangements and working very closely with the travel industry to organise repatriation flights.
"Clearly though, with XL Airways no longer operating, we're having to bring in substitute aircraft to bring people home."
He said package deals are covered by the CAA's Air Travel Organisers' Licensing (Atol) scheme and those customers will be offered repatriation flights or their money back if they have an advance booking.
However, those who booked directly with the airline or XL.com - who are in the minority according to the CAA - will face a fee.
Stranded XL tourists wait at airports around the world
Anyone yet to take their flights should check their insurance policies, and with their banks or credit card companies about refunds, he added.
XL - which carried 2.3 million passengers last year - is the latest travel business to face financial difficulties, as the industry struggles with high fuel costs and an economic downturn.
But an agreement has been reached whereby Straumur Investment Bank has acquired XL's German and French subsidiaries, which Straumur considers to be financially viable and sustainable businesses.
They will continue operations as separate commercial entities.
Share prices in holiday firms TUI Travel and Thomas Cook were up 6% and 7% following the collapse of their rival.
"As the travel industry matures in Europe, there was always going to be pressure on those operating in the mid-market," said Lastminute.com chief executive Ian McCaig.
A statement on the XL group's website said: "The companies entered into administration having suffered as a result of volatile fuel prices, the economic downturn, and were unable to obtain further funding."
BBC travel correspondent Tom Symonds added that the industry would be facing an "enormous challenge" as it deals with the fall out of XL's collapse.
"XL wasn't just an airline, it was a fundamental link in Britain's package-holiday industry," he said.
"Getting these people to and from their holidays will be an enormous challenge, not least because of the shortage of aircraft caused by so many airline collapses in recent weeks.
"XL can't use its own airliners for, among other reasons, it has no insurance now."
The CAA said it was working with the travel industry to bring stranded holidaymakers home, and denied it had been responsible for the grounding of XL's planes.
Airlines BA, Easyjet, BMI, Flybe and Ryanair have offered to fly some of the stranded passengers home.
Easyjet chief executive Andy Harrison told the BBC that its fuel efficient planes had helped it cope with the high cost of aviation fuel, although on Thursday it said it would cut up to 60 jobs to remain competitive.
Mr Wyatt added that spiralling oil prices had increased the firm's costs "year-on-year by over $80m".
"So where many people have been making hay with high oil prices, this is the repercussions of that hay - 1,700 people potentially out of work today in the UK," he said.
Rival TUI warned that rising fuel costs meant that "airlines with less than robust business models" - such as XL and Futura - were now failing.
David Clover from the CAA
It added that the government should take steps to ensure all holiday companies must belong to the Atol scheme, which offers package holiday makers financial protection.
In the US, one flight from Orlando to Manchester managed to set off, while one bound for Gatwick was grounded. A source at the airport said accommodation was being found for the "distressed" passengers.
In the UK, air traffic control prevented three XL aircraft from taking off from Manchester Airport.
The XL group, which is based in Crawley, West Sussex, runs an airline and owns several travel companies, including Travel City Direct, Medlife Hotels Limited, The Really Great Holiday Company, Freedom Flights and Kosmar Holidays.
The company flies mainly from bases at Gatwick, Manchester and Glasgow airports.
Travel writer Simon Calder warned that many thousands of XL customers hoping to fly to the Caribbean, Mediterranean, North Africa and North America, from airports across the UK in coming weeks and days "simply won't be going anywhere".
Jim Duwaine, from Portsmouth, said he was given the news when he arrived at Gatwick, where he had been due to catch an early morning flight to Menorca.
HELP OFFERED TO XL CUSTOMERS
Flybe - offering flights for 90 euros (£71.50)
BA- offering a one-way discount
Easyjet- flights offered for £75
BMI - provided aircraft to CAA to transport people home
Ryanair - has offered spare plane to CAA for transport
He said: "Absolutely devastated. Got up at midnight planning on going on holiday, but got let down, unfortunately. We're here, just trying to get some other flights, but it's not looking good. I think everyone else has got the same idea."
Other holidaymakers have said they have been quoted vastly inflated prices for replacement flights.
Robert Spurgeon, of Norwich - an XL customer who had been due to fly to Tenerife from Gatwick - said: "We've not been told anything but my wife's been quoted £2,000 for alternative flights."
Also among those affected are a 130-strong choir on tour to Canada from Wales who were booked on Zoom and lost £50,000 when it folded last month, and then re-booked with XL.
XL is the current kit sponsor of West Ham United, but the football club said it would end the sponsorship deal and play on Saturday in an unbranded kit.
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