The new nationalist-led government of Prime Minister Narendra Modi has grand plans to vastly strengthen India's military capability, in order to play its role as a regional power and meet challenges posed by a rising China and arch rival Pakistan.
"The defence aquisition council has cleared the last hurdle for signing of the contract with the USA in respect of Apache and Chinook," the official told Reuters, while declining to be named as he was not authorised to speak to media.
The deal topped the agenda during a visit by U.S. Defence Secretary Chuck Hagel in August and is likely to help mend ties frayed by years of trade and diplomatic disputes. Modi is due to visit the United States next month.
At a meeting on Friday, the government also approved the Indian Navy's proposal to purchase 16 multi-role helicopters, the official said. The deal could potentially benefit Sikorsky Aircraft, a unit of United Technologies Corp (UTX.N) and European joint venture NHIndustries.
Jaitley, however, cancelled a $991.65 million tender to buy 197 light-utility helicopters from foreign vendors and asked local manufacturers to produce them at home, the official said.
Eurocopter, a unit of aerospace and defense company EADS, and Russian Kamov had been participating in the tender.
The government also deferred a decision on a $2.5 billion proposal to acquire Israeli Spike anti-tank guided missiles.
Analysts estimate that India, the world's largest arms importer, will spend $250 billion in the next decade to upgrade its Soviet-era military equipment and narrow the gap with China, which spends $120 billion a year on defence.
India's military modernization plan includes a renewed push to develop a domestic weapons industry. India insists on "offsets" from foreign vendors to ensure technology is transferred or some of the deal's value remains in the country.
The decision to scrap the troubled light helicopter tender comes weeks after Modi loosened the limit on foreign ownership in defence manufacturing to 49 percent from 26 percent to make "buy Indian" the default option for defence purchases.
"It has also been decided that the Indian Industry would be given the responsibility to produce nearly 400 Light Utility Helicopters (LUH) as per the requirement of the Indian Army and Air Force," said the official.
A slew of kickback allegations, procurement delays and a recent spate of operational accidents have marred efforts to upgrade India's armed forces.
A decision on the acquisition of light reconnaissance helicopters was deferred last year and tenders re-examined after Italian prosecutors alleged defence group Finmeccanica had paid bribes to Indian officials to win a separate $750 million deal to supply luxury helicopters for political VIPs.
New Delhi partially banned Finmeccanica this week from bidding for future contracts. Finmeccanica denies any wrongdoing.
Finmeccanica's AgustaWestland unit has a 32 percent stake in NHIndustries, which is 62.5 percent owned by EADS' helicopter unit Eurocopter, and Stork Fokker owns 5.5 percent.