NEW YORK/NEW DELHI (REUTERS) - An Indian diplomat charged in New York with visa fraud and making false statements about her domestic worker has won a dismissal of her federal indictment, in a move that could help smooth over a dispute that has frayed US-India ties.

Ms Devyani Khobragade, who was India's deputy consul-general in New York, had diplomatic immunity when she sought on Jan 9 to dismiss the indictment, and thus could not be prosecuted, US District Judge Shira Scheindlin in Manhattan ruled on Wednesday.

New Delhi gave a cautious welcome to the news but it was far from clear if the matter had been fully resolved. US prosecutors could still seek a fresh indictment, while in India reports emerged that Ms Khobragade's two children held both US and Indian passports, in apparent violation of Indian rules.

India is due to kick off a general election on April 7 and its major political parties have vied to outdo each other in condemning the US over the Khobragade case, as they seek to match public anger over the row.

Mr Narendra Modi, the prime-ministerial candidate of the opposition Bharatiya Janata Party (BJP), brought up the diplomat's "ill-treatment" in a meeting with US ambassador to India Nancy Powell last month. Mr Modi has topped several recent opinion polls as the most popular choice for prime minister.

US prosecutors have accused Ms Khobragade of making Ms Sangeeta Richard, her housekeeper and nanny, work 100-hour weeks at a salary of just over US$1 (S$1.27) an hour, far below the legal minimum US wage of US$7.25 an hour.

They argued that the indictment should stand because Ms Khobragade did not have diplomatic immunity either when she was arrested, or now that she has left the country. They can seek a fresh indictment but it is not yet clear if they will do so.

"As the court indicated in its decision, and as Devyani Khobragade has conceded, there is currently no bar to a new indictment against her for her alleged criminal conduct, and we intend to proceed accordingly," said Mr James Margolin, a spokesman for US Attorney Preet Bharara in Manhattan.

Judge Scheindlin said Ms Khobragade had immunity on Jan 9 when the indictment was issued, having the day before been named a counsellor to India's mission to the United Nations. She also lifted Ms Khobragade's bail and said open arrest warrants based on ruling that the indictment must be thrown out.

India's foreign ministry welcomed the dismissal but would wait for its lawyers to go through the court order before giving a detailed reaction, a ministry spokesman said. The US Department of State was not immediately available for comment.

Ms Khobragade, 39 at the time of her arrest on Dec 12, is now working for the foreign ministry in Delhi, having left the United States in January, said her US lawyer, Daniel Arshack.

Ms Khobragade's arrest and subsequent strip-search provoked an outcry in India, setting off reprisals against US diplomats and the removal of some security barriers near the US embassy in New Delhi. Many Indians thought the case reflected US arrogance towards their country.

The dispute led to the postponement of trips by US officials and business executives to India, although this month moves have been made to get relations between the world's two largest democracies back on track.

Assistant Secretary of State Nisha Biswal, Washington's point person for South Asia, visited India last week after a two-month delay. US Energy Secretary Ernest Moniz also came to India this week on a postponed trip.

The attempts to strengthen ties, however, are blighted by trade rows between the two countries over issues including drug patents and solar panels.

Meanwhile, the citizenship of Ms Khobragade's children is causing a stir in India, with fresh local media reports on Thursday that her two daughters have both US and Indian passports. India offers certain kinds of lifelong visas for people of Indian origin but does not allow dual citizenship.

Ms Khobragade's father, Mr Uttam, told Reuters that the children are US citizens who have only been issued Indian passports to allow them to travel with their mother. They do not have dual citizenship and their Indian passports are kept at the Indian embassy in New York, he said.

"What is the great deal with that?" he said. "This is just to facilitate their travel." The foreign ministry declined immediate comment on whether this broke any rules.