India has cancelled a $753m controversial helicopter deal with an Italian defence group amid bribery allegations.

The country's defence ministry said in a statement issued on Wednesday that it had terminated with immediate effect the agreement with Finmeccanica's Agusta Westland "on grounds of breach of a pre-contract integrity pact".

India froze payments for the 12 AW101 helicopters after Giuseppe Orsi, Finmeccanica's then-chief executive, was arrested in February on suspicion of paying bribes to secure the deal, embarrassing the New Delhi government before parliamentary elections due by May 2014.

In November, the helicopter maker had sought arbitration to try to salvage the contract, a request that the Indian government had rejected.

But India has now appointed its own arbitrator "with a view to safeguard the interest of the government", the defence ministry statement said.

AK Anthony, India's defence minister, has said he did not believe AgustaWestland's denial that it paid bribes to swing the deal.

Anthony had a meeting with Indian Prime Minister Manmohan Singh hours before the latest decisions were announced.

Finmeccanica defends position

Finmeccanica spokesman Roberto Alatri said the company would defend its position.

"We've not received any official communication yet but we will do everything that would be necessary to defend the

correctness of our position," Alatri said.

"We're sure our behaviour was ethically correct."

India suspended the deal for the luxury helicopters to transport VIPs last year after Italian investigators began looking into accusations that AgustaWestland paid bribes to win the contract.

Wednesday's announcement by India is seen as a government attempt to contain the fallout from the corruption scandal before elections due by May.

The scrapping of the deal, which will now go through a probably lengthy legal process, is a fresh setback for Finmeccanica.

Delays in selling some of its money-losing assets have prompted credit rating agencies to downgrade the company to junk.

Indian defence deals have been hit by a number of corruption allegations over the past two decades but a Defence Ministry spokesman said this was the first cancellation of a major deal.

Paying or accepting bribes is prohibited by India's defence procurement rules. The government can cancel a contract if an integrity pact in the rules is violated, and the seller has to forfeit any security money it deposited as a bidder.

India's federal auditor said in August last year that the ministry had initially stipulated that the helicopters should be able to fly to an altitude of 6,000 metres (19,685 feet), which meant that AgustaWestland could not compete since the AW101 was certified to fly only to 4,572 metres (15,000 feet).