China in February barred its airlines from participating in the European scheme, which is meant to reduce emissions.

The Indian official, with direct knowledge of talks between the EU and other countries on the issue, told Reuters that India will soon ask local airlines not to share emissions data with the bloc or buy any carbon credits.

If the EU retaliates by suspending Indian airlines from flying to Europe, India would make similar moves and consider charging an "unreasonable" amount for flying over India, the official said on Monday.

"We have lots of measures to take if the EU does not go back on its demands. We have the power of the economy, we are not bleeding as they are," the government official said, adding that Europe's position would harm its own economy and airlines.

Indian government is awaiting formal approvals from several ministries to implement the order to airlines, which it expects soon, the official said.

"The questions is, are you EU.L provoking the world into a trade war?" the official said.

Last week, China suspended the purchase of 10 more Airbus (EAD.PA) jets, raising the stakes in the trade row over European Union airline emissions charges.

India does not yet plan to ask airlines to cancel Airbus purchases, but that is a possibility if the dispute escalates, the Indian official said.

Amber Dubey, director for aviation at global consultancy KPMG, said India is in the midst of a huge increase in the size of both its civilian and defence fleets, with a significant share of the orders coming from European suppliers.

"The EU-ETS (emissions trading scheme) issue is escalating fears of a trade war between EU and the rest of the world. There is a chance that the government may decide to use these large aircraft orders as a negotiating tool", Dubey said.

European planemaker Airbus has a 73 percent share of the commercial plane market in India. It has orders for more than 250 planes with IndiGo, Go Air and Kingfisher Airlines (KING.NS), making fast-growing India a crucial growth market.

Foreign governments say the EU is exceeding its legal jurisdiction by charging for an entire flight, as opposed to just the part covering European airspace.

The European Commission argues the scheme is needed to cut rising emissions and help the world fight climate change.

India this month inadvertently delayed approval of some European summer schedules by a day, which disrupted the flight schedules of many European airlines.

The official said India may use that example to show how disruptive a dispute with the country could be.

"If things continue like this, then European airlines will be forced to avoid flying over India and go over the Indian Ocean and the Bay of Bengal," the official said. "That's not viable for them. They won't have fuel to do that."

(Editing by Tony Munroe and Anthony Barker)

• A Permanent Economic Emergency