India on Friday said it had taken steps to cancel a contract for 12 Italian helicopters amid allegations the deal was won through kickbacks as the head of the suspected defence company stepped down.
The Indian ministry of defence said in a statement it had "initiated action for cancellation" of the $748 million contract for the helicopters from AgustaWestland, a unit of Italian aerospace group Finmeccanica, intended for use by top politicians.
India, which has already put payments to the company on hold, 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.
India has already received three of the choppers. The rest were to be delivered by the end of 2014.
The decision is a severe blow to Finmeccanica, whose chief executive Giuseppe Orsi resigned from behind prison bars on Friday.
Orsi, who was arrested on Tuesday over the alleged bribes, also stepped down as a member of the board and presented his resignation letter to judge Luca Labianca, who heard his testimony in jail.
Orsi's lawyer said the resignation was aimed at "calming the climate created by the probe" into his client and the former head of its helicopter division AgustaWestland, Bruno Spagnolini, who is also due to be interrogated.
The purchase came under scrutiny from Italian investigators probing allegations the group had broken the law by paying bribes to foreign officials.
Italian prosecutors suspect that kickbacks worth up to 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.
Cash was allegedly handed to a cousin of former Indian air force chief S.P. Tyagi, who denies wrongdoing, with more money funnelled via a web of middlemen and companies in London, Switzerland, Tunisia and Mauritius.
Orsi denies any wrongdoing and his lawyer has called the allegations against him "inconsistent" and his arrest "unjustified".
"I never knew anything about illicit operations," Orsi said according to his lawyer, adding that he had never met members of the "Tyagi family".
But Italy's daily La Repubblica quoted from what it said was a transcript of a bugged phone conversation involving Orsi in which the CEO could be heard saying: "They're talking about the Indian general? Shit, are they talking about the 0.5 percent?"
The latest move by the Indian defence ministry is seen as an attempt by the government to contain the fallout from the corruption scandal ahead of elections in the first half of next year.
The chopper deal was cleared by Indian Prime Minister Manmohan Singh, whose Congress-led government has been buffeted by a series of corruption scandals that analysts say could affect the party's electoral chances in 2014 polls.
The scandal will also overshadow a visit to India next week by British Prime Minister David Cameron amid fears of delay in other negotiations for lucrative defence contracts.
AgustaWestland, a wholly owned Anglo-Italian unit of Finmeccanica, was manufacturing the helicopters at its plant in southwest England.
The Indian unit of Transparency International, a global anti-corruption watchdog, welcomed New Delhi's move to invoke clauses in the "integrity pact" which it said could lead to cancellation of the deal as well as blacklisting of the Italian firm.
Shares in Finmeccanica, in which the Italian state is the main shareholder with a 30.2 percent stake, were down over 3.0 percent in afternoon trading in Milan.