To defuse the spat, India wants the U.S. State Department to approve Khobragade's transfer to its U.N. mission in New York, a move it believes would give her immunity from prosecution.
If that doesn't happen before the U.S. government commences a preliminary hearing or files an indictment, India could take more retaliatory measures, a government source with knowledge of the affair told Reuters.
U.S. officials hope for a resolution of the row through some sort of plea-bargaining process, but if it persists, the next casualty could be the trip by Moniz, who is due in Delhi for talks to promote trade and investment in the energy sector. The talks usually include discussions of civil nuclear trade between India and the United States.
For now, the trip has not been cancelled. However, the U.S. Assistant Secretary of State for South Asia, Nisha Desai Biswal, has postponed her first visit to India, which was due on Jan. 6, to avoid it becoming embroiled in the dispute.
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State Department spokeswoman Marie Harf said Biswal would visit India as soon as possible, but no date had yet been set.
"Has an era of steadily improving ties between the two countries come to an end?" asked Indian Human Resource Minister Shashi Tharoor in a column published this week.
"Indian-American relations had been strengthening owing to both sides' shared commitment to democracy, common concerns about China, and increasing trade and investment," he wrote.
"The Khobragade affair suggests, however, that all this is not enough: sustaining a strategic partnership requires, above all, mutual respect."
The United States had high hopes India would emerge as a counterbalance to a rising China and a new engine for the U.S. economy.
However, there is a widespread sense that the relationship has drifted since a sharp improvement brought by India's 2009 deal on nuclear cooperation with the Bush administration.
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Frustration has grown among the U.S. corporate lobby. Indian sourcing rules for retail, IT, medicine and clean energy technology are contentious and U.S. companies gripe about "unfair" imports from India of everything from shrimp to steel pipes. In June, more than 170 U.S. lawmakers signed a letter to Obama about Indian policies they said threatened U.S. jobs.
Now, with general elections due in India in four months, and mid-term elections in the United States in November, the fear is that the current row will make it harder for both sides to stick their necks out and make progress on thorny issues such as liability for nuclear equipment suppliers.
"There is such a long laundry list of concerns on the American side that seem to be ignored or slow rolled in India,' said Persis Khambatta at the Center for Strategic and International Studies think tank. "The risk is that this (Khobragade) incident will dig up a lot of frustration that had built up."