State-run Indian refiners, which cut petrol prices in June following public anger, ordered a sharp 12-percent hike in the rate of diesel on Thursday in a step that is expected to draw opposition.
A petroleum ministry official told AFP the price of diesel has been hiked by five rupees, which equates to a 12-percent increase on the New Delhi city rate of 41.32 rupees (74 US cents) a litre.
The Press Trust of India said the decision on the expected increase was made at a cabinet meeting headed by Indian Prime Minister Manmohan Singh in New Delhi.
Kerosene prices, used extensively by the poor, were left unchanged, as was the cost of liquefied petroleum gas (LPG) cylinders, also used for cooking but PTI said cooking gas bottles would now be rationed.
Petrol prices were untouched after they were slashed three months ago to mitigate a sharp increase in May that sparked public protests and anger among the government's coalition allies.
India imports around 80 percent of its oil needs and the import bill has risen dramatically because of high global prices and a plunging rupee.
State-run refiners complain that they are forced to incur massive losses due to government price controls that set selling rates below the international price.
Premier Singh's Congress-led government, which is scheduled to face elections in 2014, deregulated petrol prices in 2010 in a reform aimed at reducing the subsidies it pays to state-run fuel refiners.
The high cost of imported fuel is partly blamed for the ballooning of India's current-account deficit -- the gap between exports and goods and services imports -- to its widest level in eight years.
The government is also under pressure from ratings agencies and investors to rein in its subsidy bill to reduce a ballooning public spending deficit.
But the increase Thursday is likely to stir opposition from the populist parties within the coalition and give further ammunition to opposition parties.
It will also spur inflation at a time of slowing economic growth.