India is the latest Asian country to admit defeat in its battle to shield its population from rising oil prices.

The Indian Government raised petrol prices by 11 per cent to stem losses, running at an estimated £50 million a day, suffered by the country's state-owned petrol companies. The price of diesel was increased by 9per cent and cooking gas 17 per cent.

Economists said that the move could derail economic growth in the region, stoke inflation and influence Indian elections.

Caps on petrol prices have crumbled in countries including Indonesia - which raised fuel prices by nearly a third last month - Taiwan, Pakistan and Sri Lanka. China is considering lifting the oil price threshold at which oil companies pay windfall taxes,which could lift some pressure on what consumers pay for fuel.

Oil fell below $123 a barrel on Wednesday, to its lowest in nearly three weeks, after strong US inventory figures and the expectation that Asian fuel price rises will curb demand.

India's price rises will increase pressure on the country's ruling coalition, led by the Congress Party, which has suffered local election defeats ahead of a general election that must be held before May 2009.

Manmohan Singh, the Indian Prime Minister, said the move was inevitable: “Our oil companies cannot go on incurring losses. They will have no money to import crude oil from abroad.”

Economists at Lehman Brothers said higher petrol costs would help to lift India's wholesale rate of inflation to 8.5 per cent, a 13-year high, and well above policy makers' 5 per cent comfort threshold.

Sonal Varma, the Lehman economist, said: “Higher fuel prices are negative for growth, weakening consumer demand, squeezing producer margins and increasing costs.”

The main opposition Bharatiya Janata Party said: “If fuel price increases are inevitable, then the exit of the Prime Minister and his Government is inevitable as well.”

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