India's government struggled to contain the fall-out Friday from a fresh corruption scandal involving the purchase of Italian helicopters for VIPs which has blown up the year before national elections.

The arrest earlier this week of the boss of Italian firm Finmeccanica has touched off a firestorm in New Delhi, leading to parallels between a famous graft case in the 1980s which helped bring about a change in government.

India signed a $748-million deal in 2010 to buy 12 helicopters for use by VIPs from Finmeccanica's Anglo-Italian unit AgustaWestland, which beat off competition from American and Russian rivals to land the lucrative contract.

The purchase came under scrutiny from Italian investigators probing allegations the Italian group had broken the law by paying bribes to foreign officials, leading to the arrest of Giuseppe Orsi in Milan on Tuesday.

Revelations from the preliminary investigation report, based on testimony from whistleblowers, suggest up to 51 million euros ($68 million) was paid in kick-backs to secure the deal, according to press reports.

Cash was allegedly handed to the 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.

"The deal has the potential to become a big issue during the 2014 general elections," said Sanjay Kumar of the Delhi-based Centre for the Study of Developing Societies.

Finmeccanica's Orsi denies any wrongdoing and his lawyer has called the allegations against him "inconsistent" and his arrest "unjustified".

The scope for serious political and economic damage in India is vast, with the reputation of "Mr Clean" Defence Minister A.K. Antony at stake amid questions over why he delayed investigating the deal.

He ordered a police probe this week, nearly a year after the first reports about bribery surfaced, and three months after telling parliament the Indian government was unable to gain any information on the Italian investigation.

"The Italian authorities have been the whistleblower in this case otherwise the entire deal would have never tumbled out from the closet," senior opposition leader Ravi Shankar Prasad from the Bharatiya Janata Party (BJP) told AFP.

President Pranab Mukherjee could also find himself in the firing line as he was defence minister when key parts of the deal -- allegedly influenced by air chief Tyagi to favour AgustaWestland -- were approved.

India has suspended deliveries and payments on the contract in a move likely to cause severe financial problems for Finmeccanica which could find itself blacklisted if any allegations are proved.

The knock-on effects of the scandal might also delay other negotiations for defence contracts under India's giant armed forces modernisation programme that has turned the country into the world's biggest arms buyer.

"Suspending the deal has a direct impact on India's credibility as a buyer," C. Uday Bhaskar, a defence analyst and a former naval officer, told AFP.

It is also likely to lead to more disruption in parliament when it opens next Thursday and will overshadow the visit of British Prime Minister David Cameron, who is due in India on Monday and Tuesday next week.

The VIP helicopters, sold at $62 million each due to the high-end specification and modifications demanded by India, are being manufactured in southwest Britain.

India goes to the polls in the first half of 2014 with the ruling Congress party struggling in the face of sharply lower economic growth and serious credibility problem after a string of corruption scandals.

Corrupt defence deals have been the undoing of governments before, with prime minister Rajiv Gandhi voted out of office in 1989 largely over a scandal involving Swedish firm AB Bofors and the sale of 400 howitzer guns.

Illegal commissions were allegedly paid to an Italian businessman who was a close personal friend of Gandhi and his Italian wife, Sonia, in an episode that tarnished the political dynasty.

The Gandhis denied any wrongdoing and police closed their case against alleged middleman Ottavio Quattrocchi in 2011 after failing to secure his extradition or find conclusive evidence.

Sonia Gandhi is now the head of the Congress party.