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A three-judge bench said that ambassador Daniele Mancini, who had negotiated the release of the marines so they could return home to vote, should remain in India until the next hearing about the dispute on Monday.
"Mr. Daniele Mancini shall not leave India without the permission of this court," a notice read out by Chief Justice Altamas Kabir said, according to a copy sent to AFP.
The ruling appeared to run contrary to diplomatic norms guaranteeing the freedom of movement of foreign envoys and risks a further souring of relations between Rome and New Delhi, which were hit recently by a helicopter corruption scandal.
Mancini's lawyer Diljeet Titus confirmed the order, while the Italian embassy in New Delhi did not returned calls or reply to emails when contacted by AFP.
Rome announced on Monday that it was reneging on commitments to send back Massimiliano Latorre and Salvatore Girone, who face murder charges over the death of two Indian fishermen in February last year.
The marines shot dead the fishermen off India's southwestern coast when a fishing boat sailed close to an Italian oil tanker they were guarding. They say they mistook the fishermen for pirates.
After negotiations in the Supreme Court, where Mancini filed a affidavit promising to return the marines, they were allowed to return home for four weeks to vote in the February 24-25 national elections in Italy.
An Indian foreign ministry spokesman said the government was obliged to follow Supreme Court rulings, but refused to be drawn on whether this would require it to break the Vienna Convention which governs diplomatic relations.
"We would not like to get into hypothetical situations," Syed Akbaruddin said at a press conference in New Delhi.
Article 29 of the Vienna Convention on Diplomatic Relations of 1961 states that diplomats shall "not be liable to any form of arrest or detention".
But Akbaruddin added that "if the diplomatic agent willingly submits to the jurisdiction of a court, then that jurisdiction applies".
Italy insists the marines should be prosecuted in their home country because the shootings involved an Italian-flagged vessel in international waters, but India says the killings took place in waters under its jurisdiction.
Relations between the two countries have been soured by the corruption allegations surrounding a $748 million deal for the purchase of 12 Italian helicopters which the Indian government is now threatening to scrap.
Italy is India's fifth-largest trading partner in the European Union and its 12th largest foreign investor, government data show. Two-way trade reached $10.99 billion in 2011, up by $1.68 billion from the previous year.
The Supreme Court passed the order against the Italian ambassador after Attorney General G.E. Vahanvati, India's top law officer, detailed how Italy had failed to honour its commitments.
"It is a breach of the undertaking given to the highest court of the land and the government is extremely concerned about it," Vahanvati told the bench headed by Chief Justice Kabir.
Akbaruddin said the foreign ministry had "initiated a study of our interactions with Italy" with a view to taking action against the country.
Mancini was summoned to the Indian foreign ministry on Tuesday and Prime Minister Manmohan Singh has warned of "consequences" unless the two men are returned by a deadline of March 22.
Singh and Foreign Minister Salman Khurshid are under pressure from the opposition as well as sections of the media to give a firm response, which reports suggested earlier in the week could include expelling Mancini.
One columnist, writing for the FirstPost website, accused Italy of racism on Thursday, saying that "what they (Italy) seem to resent is that brown-skinned Indians may be sitting in judgement on their people".
Singh's rivals in the main opposition Bharatiya Janata Party have accused Italy of treating India like a "banana republic".