Writers and champions of free speech have widely criticised Penguin's decision to withdraw all copies of The Hindus: An Alternative History, a book that some sections in India viewed as offensive.
Penguin Books India on Tuesday agreed to withdraw from sale all copies of the book that takes an unorthodox view of Hinduism. All copies of the book are to be destroyed as part of a settlement after a case was filed against the publisher.
The Shiksha Bachao Andolan Committee, a group of Hindu academics, filed civil and criminal suits in a New Delhi court claiming the book contained factual errors and parts of it misrepresented Hindu mythology.
Commentator Pratap Bhanu Mehta wrote in an opinion piece in The Indian Express newspaper that "the agreement by the publisher to withdraw it is like putting a contract out on free expression".
Wendy Doniger, the author of the controversial book, said she was "angry and disappointed" that all copies of her book would be pulped in India.
"I was of course angry and disappointed to see this happen and I am deeply troubled by what it foretells for free speech in India in the present, and steadily worsening, political climate," she wrote in an email statement sent to the AFP news agency.
Doniger, 74, wrote in her statement that as a "publisher's daughter, I particularly wince at the knowledge that the existing books [unless they are bought out quickly by people intrigued by all the brouhaha] will be pulped".
Penguin India has not responded to repeated requests for comment, but Doninger sprang to the defence of the publisher, which is part of the publishing giant Penguin Random House.
"Penguin India took this book on knowing that it would stir anger in the Hindutva ranks, and they defended it in the courts for four years, both as a civil and as a criminal suit," she wrote.
The mutual agreement between the publisher and the activist group does not impose any legal binding on any other Indian publisher that wishes to publish Doniger's book in India, lawyers say.
India banned Salman Rushdie's 1988 novel The Satanic Verses which is viewed by some Muslims as blasphemous.
Last year, the Indian unit of Bloomsbury agreed to withdraw The Descent of Air India, authored by a former executive of the national carrier after a complaint from former aviation minister Praful Patel.