The US says it is not pressuring India to drop claims against an American corporation linked to the 1984 Bhopal chemical explosion which killed thousands of people.
Leaked emails revealed by Indian media this week suggest senior US officials told India to end its "noise" about the chemical disaster, in order to secure loans from the World Bank.
"We are hearing a lot of noise about the Dow Chemical issue," Mike Froman, the US deputy national security adviser, wrote in July to the deputy chairman of India's planning committee.
"I trust you are monitoring it carefully ... I think we want to avoid developments which put a chilling effect on our investment relationship," Froman wrote in the email released on Wednesday.
'Not a threat'
On Thursday, Froman denied he was trying to pressure India to drop renewed claims against Dow Chemical, the company responsible for liabilities from the chemical disaster in the city of Bhopal, which led to about 15,000 deaths and 500,000 cases of illness.
"I was not ... issuing a 'threat' of any sort - any assertion to the contrary is absolutely wrong, both intent and in fact," Froman wrote.
He did not deny writing the email in question.
"I am dismayed to think that anything I wrote could be interpreted as minimising the toll of the Bhopal disaster. The human suffering as a result of Bhopal is a terrible tragedy."
Union Carbide, owners of the Bhopal plant before the company was acquired by Dow Chemical, paid tens of thousands of victims $470m in an out-of-court settlement in 1989.
Many say that payment only covered a fraction of overall costs associated with the disaster.
The US also refuses to extradite Warren Anderson, the former Union Carbide CEO who many blame for the disaster, a decision which has raised ire in India.
US officials are keen to end the uproar over alleged malfeasance on the Bhopal issue, and Barack Obama, the US president will visit India in November, hoping to sign a series of investment agreements, particularly in the nuclear sector.
For critics, Bhopal represents everything which can go wrong in an emerging economy where powerful players can circumvent the repercussions for actions which harm human health and the environment.
In what some see as a sign of growing distrust with big-business, Indian law-makers toughened potential liabilities for companies investing in the country's nuclear industry, in a draft law approved on Friday.
The bill, which is likely to be passed in parliament next week, triples corporate liability for compensation in case of a nuclear accident to $320m.
The US-India Business Council estimates India's nuclear energy market to be worth $150bn over the next 30 years.
Unlike their French and Russian competitors, US companies that invest in nuclear power abroad do not have their liabilities under-written by government.
US firms like General Electric have been reluctant to invest without a new legal framework, which specifies the amount of compensation they would have to pay if an accident took place.
"After the bill is passed in parliament, we will enter a series of negotiations for the purchase of equipment and we will see actual contracts being signed," Prithviraj Chaven, junior minister for science and technology, said on Friday after lawmakers agreed to the draft law.
Critics of the earlier draft had blasted the compensation cap of $110m, drawing parallels to US corporate involvement in the Bhopal disaster.