The US departments involved in the review include the National Security Council of the White House, the State Department and the Justice Department.
"An inter-agency review is going on right now to look into the lapses that happened in the case," sources told PTI.
In a tacit acknowledgement of the fact that there was a "judgemental error" in handling this case, sources said the inter-agency team led by the State Department is "working 24X7" to get it resolved as quickly as possible.
Now that the matter has landed up in the judiciary, a lot depends on the judges too - for which the Department of Justice and the Southern District of New York is being actively engaged.
It is believed that the Department of Defense has expressed its displeasure over the manner in which the entire issue was handled.
At a time, when the Pentagon is busy reviewing its policy towards Asia Pacific region wherein India fits as a major player in its scheme of things and is eyeing to have a large pie in the modernisation programme of the Indian armed forces, the last thing it would like to see is any strain in its ties with New Delhi, officials said.
A 1999-batch IFS officer, Khobragade, India's Deputy Consul General in New York, was arrested on charges of making false declarations in a visa application for her maid Sangeeta Richard. She was released on a USD 250,000 bond.
The 39-year-old diplomat was strip searched and held with criminals, triggering a row between the two sides with India retaliating by downgrading privileges of certain category of US diplomats among other steps.
The strong Indian reaction came as a "shock and disbelief" here, especially to those who have anything to do with the country's foreign policy, as they had never expected such a strong retaliatory measure from New Delhi.
Top officials of the Obama Administration - in particular those in the State Department, Department of Justice and White House - took it simply a matter of "enforcing" law of the land, which was exploited by Sangeeta to immigrate to the US. Those who matter in the India-US relationships including the government and the lawmakers have now started murmuring that the "pros and cons" of such an arrest was not given a serious thoughtful consideration before giving a go ahead.
"We have taken a hit. We will have to face the consequences," an administration source told PTI.
India has asserted that such an arrest was not only in violation of the Vienna Convention on diplomatic and consular immunity given that she was a member of the Indian delegation to the UN, but also against the letter and spirit of the India-US relationship, which President Barack Obama has been trying hard for the last five years.
Officials here concede that given New Delhi's past track record, it was never conceived by the American foreign policy makers that India would react to the arrest of its diplomat the manner it did after the December 12 incident.
After all, there had been precedent of Indian envoys and top past and present officials being subject to humiliating and disrespectful treatment during their US visits, mostly at the airports, and there was hardly any protest, they said.
But as India said "enough is enough" and raced to withdraw privileges of American diplomats in India, officials here have been "forced to rethink" over their "treatment" and "relationship" with India, which Obama has described as the defining partnership of 21st century.
India's unusual tough stand is being seen here as a reflection of the emergence of a strong and powerful country, officials said even as they continue to defend the decision taken by them to arrest Khobragade.
The Indian assertiveness was visible in the first 100 hours of the arrival of new envoy S Jaishankar who has a pro- US image because of his key role in the historic nuclear deal.
In his initial meetings with officials of the Obama Administration, Jaishankar made it clear that the "stalemate" in the bilateral ties would continue till Khobragade issue is resolved in a respectful manner and New Delhi is assured that its diplomats are treated in a manner in which they should be.
This has come as a surprise to the US.
It is this assertiveness of Indian diplomats and political leaders that is forcing US officials to evolve a fresh policy with India that takes into consideration its sensitivities.
"This (India's reaction after the arrest of Khobragade) is something, we never expected," another official said.
Acknowledging that the US has lost it badly in the media including the social media so far, sources said it is the United States which is to be affected the most if there is a stalemate in the relationship.
The withdrawal of diplomatic privileges to American diplomats in India is just the tip of an iceberg.
Given that India is seen in the third world countries as a leader, any withdrawal of diplomatic privileges here could set a bad precedent and could soon be followed by other countries too, officials here fear.
Not only this the US is expected to come under a lot of "pressure" from other Asian countries in particular those in the Asia Pacific region including Japan, as they consider India as an integral part of any effort to contain China, officials said.
India too understands the importance of this relationship in the overall context of its national security, in particular in its immediate neighborhood in the North and the West, sources said, adding that any deterioration in the relationship is not in the interest of New Delhi as well.