The rocket carrying the 2.2-tonne telecommunications satellite veered off its course after what appeared to be a textbook launch on Monday. A mid-air explosion followed and debris seen falling into the sea off the country's southeastern coast.
"The mishap happened in the first stage of separation," said Madhavan Nair, chairman of the Indian Space Research Organisation (ISRO). "We will analyse the data to see the sequence of events."
The rocket launch, from the Sriharikota launch site in the Bay of Bengal, was delayed twice during the day because of technical problems.
The satellite was designed for a mission life of 10 years and was intended to boost television services, officials said.
If the launch had been successful, it would have given India the chance to enter the $2 billion global satellite launch market.
India had planned to offer clients satellite launches at a third of the cost of using the United States, Europe or Russia.
Commentators, however, played down the failed launch.
"It is not a setback. It is certainly a disappointment," former ISRO chief UR Rao said. "It is a good rocket and it has proved itself in three previous launches."
The Indian space agency is investing $543 million to upgrade the infrastructure for heavier rockets that can carry satellites weighing up to four tonnes.
The agency is also preparing for an unmanned mission to the Moon called "Chandrayaan" in 2008 in association with NASA.
On Sunday, the test-firing of India's longest-range nuclear-capable missile also failed, when the Agni III plunged into the sea after being in the air for only five minutes instead of the expected 15.