The decision was taken by India's Union Home Ministry a day after the Supreme Court restrained Italian Ambassador Daniele Mancini from leaving the country without the court's permission, a report by the Times of India said.
The move is part of a row over the Italian government's refusal to return to India two Italian naval guards charged with killing two Indian fishermen off the coast of Kerala state in February 2012.
Last month Mancini gave Indian police an assurance that the marines would return to India after two weeks if Indian authorities allowed them to go back to Italy to vote in the national election.
Indian Attorney General G. E. Vahanvati told the Supreme Court that "it's a breach of undertaking given to the highest court of the land and the government is extremely concerned about it," the Times report quoted him as saying.
The court put the ambassador and the two naval guards on notice to respond to the issues.
Last week Indian Prime Minister Manmohan Singh said Italy's refusal to send the two Italian naval guards back to India to face trial for killing the fishermen was "unacceptable," a report by The Times of India said.
The marines were guarding an Italian oil tanker off India's southwestern coast when the shooting happened. The guards allegedly believed the two fishermen were pirates, a Press Trust of India report said at the time.
Italy maintains the Indian fishing boat behaved aggressively toward the Enrica Lexie oil tanker and ignored warning shots from guards who became suspicious of the fishing boat.
A civil case over the deaths was settled in late April when each family of the dead fishermen accepted around $190,000 as compensation and for dropping the charges, a Press Trust of India report said.
However, Indian authorities are continuing with a criminal case, for which the marines remain charged and await their trial in a special court in New Delhi.
Italy's envoy could face jail if he fails to give answers to India's Supreme Court this week about why the marines didn't return to India, a legal expert said.
Harish Salve, who quit as the Italian government's Indian counsel in New Delhi after Rome refused to send back two naval guards, said that the ambassador will find it "very hard" to explain why he breached his solemn undertaking.
To a question whether the Italian ambassador could end up in jail, Salve told news broadcaster CNN-IBN, "Theoretically, yes."
But the likelihood, he said, "depends on how (the court) wants to deal with him. But they can, if they want, to send him to jail," a Press Trust of India report said, quoting a CNN-IBN broadcast.
Another report by CNN-IBN said it had learned the Italian government will tell India's Supreme Court that the two marines won't return to stand trial in New Delhi.
CNN-IBN also said India is in the process of downgrading its diplomatic mission with Italy and will delay sending its ambassador-designate to Rome this month.