India's prime minister Manmohan Singh demanded that Italy return two marines Massimiliano Latorre and Salvatore Girone accused of shooting dead two fishermen last year.

Amid strained diplomatic relationship between the two countries, Singh deemed Italy's foreign ministry decision not to return the marines as "unacceptable". "They violate every rule of diplomatic discourse and call into question solemn commitments given by the accredited representative of a sovereign government to our Supreme Court," he told Parliament.

"Our government has insisted that the Italian authorities respect the undertaking they had given to the Supreme Court and return the two accused persons to stand trial in India," he said. If they don't, "there will be consequences."

The Indian government allowed the two marines, who are accused of shooting dead two fishermen they say they mistook for pirates, to come back home in February to vote in national elections with a promise from the Italian ambassador that they would return to stand trial. However, the Italian government announced on Monday that its two nationals would remain in their home country.

"Italy has informed the Indian government that, given the formal initiation of an international dispute between the two states, the marines will not return at the end of their home leave," said Italy's foreign minister Giulio Terzi.

"Italy always maintained that the Indian authorities' behaviour violates international law, in particular, it violates the right of immunity from the foreign country's judicial system."

He said that Italy was still prepared to work out a deal, "even with an international sentence or a judicial resolution".

In February, India's supreme court ruled that India had the judicial right to try the marines, setting the stage for a criminal trial. Rome had argued that the shooting, which was off the coast of Kerala, southern India, had taken place in international waters.

India's former foreign secretary Lalit Mansingh said India should follow a calibrated diplomatic strategy.

"India should make a strong representation to the Italian government that this is a breach of agreement and contempt of India's judicial system," he said. "The message can be conveyed through diplomatic channels, and also informally, that in view of this kind of behavior, India would consider debarring Italian companies from taking part in government tenders," Mansingh said.

"Today all European countries are looking at India as a potential market and a place for investment. If the Italians foolishly want to get out of this market, then so be it. The loss will be theirs," he said.