India on Friday said it had started the process of cancelling a $748-million deal for 12 Italian helicopters amid allegations that the contract was won through kickbacks.
The ministry of defence said in a statement it had "initiated action for (the) cancellation" of the contract for 12 helicopters from AgustaWestland intended for use by VIPs such as the prime minister.
The decision is a severe blow to the parent company of AgustaWestland, Italian aerospace group Finmeccanica whose chief executive was arrested earlier this week in Milan amid a probe by Italian prosecutors.
India, which has already put payments to the company on hold, also asked the Italian firm to "reply within seven days" if any terms of the contract and an "integrity pact" it signed in 2010 had been violated.
The purchase came under scrutiny from Italian investigators probing allegations the group had broken the law by paying bribes to foreign officials, leading to the arrest of Finmeccanica's boss Giuseppe Orsi on Tuesday.
Italian prosecutors suspect that kickbacks worth around 10 percent of the deal or 50 million euros ($68 million) were paid to Indian officials to ensure AgustaWestland won the contract, press reports say.
The latest move by the defence ministry is seen as an attempt by the government to contain the fall-out from the corruption scandal ahead of elections in the first half of next year.
Defence Minister A.K. Antony ordered an Indian police investigation on Tuesday.
The chopper deal was cleared by Indian Prime Minister Manmohan Singh, whose government has been buffeted by a series of corruption scandals that analysts say could affect the party's electoral chances in 2014 polls.
The cancellation will also overshadow a visit to India next week by British Prime Minister David Cameron.
AgustaWestland, a wholly owned Anglo-Italian unit of Finmeccanica, was manufacturing the helicopters at its plant in southwest Britain.