With New Delhi vowing to "restore the dignity" of diplomat Devyani Khobragade, Indian media reported that the 39-year-old was being moved from her post as deputy consul general in New York to the UN mission in a bid to thwart her prosecution.
As India retaliated against American diplomats in the usually US-friendly country, Secretary of State John Kerry tried to end the row in a telephone call to India's national security adviser Shivshankar Menon.
"As a father of two daughters about the same age as Devyani Khobragade, the secretary empathizes with the sensitivities we are hearing from India about the events that unfolded after Ms Khobragade's arrest," a State Department statement said.
Speaking to Menon, Kerry "expressed his regret, as well as his concern that we not allow this unfortunate public issue to hurt our close and vital relationship with India," it said.
State Department deputy spokeswoman Marie Harf said it was "particularly important to Secretary Kerry that foreign diplomats serving in the United States are accorded respect and dignity just as we expect our own diplomats should receive overseas."
Khobragade was arrested on December 12 in New York for allegedly paying a domestic worker a fraction of the minimum wage and for lying about the employee's salary in a visa application. She is free on bail.
The fury in India grew after an email from Khobragade in which the diplomat said she had been repeatedly stripped and cavity-searched by the US authorities after her detention.
"I must admit that I broke down many times as the indignities of repeated handcuffing, stripping and cavity searches, swabbing, in a hold-up with common criminals and drug addicts were all being imposed upon me despite my incessant assertions of immunity," she said in the email.
"I got the strength to regain composure and remain dignified, thinking that I must represent all of my colleagues and my country with confidence and pride."
Outrage grows in India
The revelation that a diplomat could be subjected to such treatment at the hands of the United States has caused huge offense in a country that sees itself as an emerging world power.
In an address to parliament, Foreign Minister Salman Khurshid said it was his "duty to bring the lady back."
"We have to restore her dignity and I will do it at any cost," he said. Prime Minister Manmohan Singh termed the diplomat's arrest "deplorable."
Bulldozers dragged away concrete barricades that had been set up outside the US embassy. US consular officials have been told to return identity cards that speed up travel into and through India, with their import clearances for duty free alcohol and other goods suspended.
In a separate call, State Department number three Wendy Sherman spoke to Foreign Secretary Sujatha Singh and voiced hope that Indian authorities "will continue to fulfill their host government obligations regarding the safety and security of our personnel and mission premises," Harf said.
With a general election just months away, the ruling Congress and the nationalist opposition Bharatiya Janata Party are both keen to be seen as standing up to the United States over the issue.
Yashwant Sinha, a former BJP foreign minister, said Tuesday that India should now arrest the same-sex partners of US diplomats after a court ruling last week that upheld a colonial-era ban on homosexuality.
Harf said the State Department has not received any indication from India that gay diplomats were in danger, but said the United States would be "very concerned" if that were the case.
Khobragade is alleged to have paid her worker just $3.31 an hour -- well below New York's required $7.25 -- despite signing a contract to pay her three times that amount.
The US Marshals Service confirmed Tuesday that Khobragade had been strip-searched like all other prisoners after being arrested while dropping her two children off at school.
Harf said the State Department has not received any notice that India wanted to change Khobragade's credentials to the UN mission. Such a move "would have to be approved by all appropriate authorities" at the UN and State Department, she said.