US authorities, predicated on Devyani Khobragade pleading guilty in the case, are willing to waive her prison term while recognising it as a criminal offence, it is learnt.
Devyani Khobragade was open to taking this discussion further with just one condition an assurance that any criminal record from the case will not impede her from entering the US in the future, be it in obtaining a visa or related law-enforcement issues, as she is married to a US national.
The MEA, however, put its foot down, saying the government could not accept any deal which will frame this case as a criminal offence as that could hurt similar cases besides complicating matters for those currently posted in the US.
The starting point for any legal deal, sources said, was to convert this case into a civil offence confined to the alleged underpayment of wages to Devyani Khobragade's maid Sangeeta Richard. All previous cases involving Indian diplomats and their domestic helps in the US have been civil offences.
But if that is done, the US would suffer some loss of face as Devyani Khobragade had been arrested on trafficking charges and those were the grounds on which Richards family was moved out of Delhi by the US embassy.
For the government, its learnt, facilitating Devyani Khobragades unimpeded re-entry into the US is not a priority as much as ensuring she gets diplomatic accreditation (G-1 visa) from the US state department following her transfer to the United Nations. Once that is done, the government may even move her out of the US after some time.
The diplomatic row is back on the boil as the January 13 deadline for Devyani Khobragades indictment looms, with Preet Bharara opposing the diplomats plea for a one-month extension on grounds that the two sides are involved in discussions to resolve the case.
Sources said the first major casualty of this fresh escalation could be the India-US Energy Dialogue for which US Energy Secretary Ernest Moniz was due to travel to New Delhi.
The dialogue was set for January 15-16 and it is believed the Indian side has suggested a postponement given the present acrimony in the relationship. The US, on the other hand, has conveyed that both sides should not let this issue affect other aspects of the relationship.
But South Block is in no such mood. It has planned a range of measures targeting US diplomats in India. Starting with simpler steps like stripping some diplomatic privileges to preparing grounds for serious legal action, all options are being explored.
The anger, it is learnt, has multiplied in the past week or so after the MEA established that it was the State Department which had taken the lead and sought prosecution in the case.
Devyani Khobragade had informed the State Department about her alleged troubles with her maid, to which Washington had asked her to meet officials of the Diplomatic Security division.
In response, New Delhi had written back saying the matter was sub-judice in India and fell outside the jurisdiction of the State Department. Thereafter, there was no communication from the US until Devyani Khobragade's arrest.