By Manoj Kumar and Nigam Prusty

NEW DELHI (Reuters) - India is seeking to cancel a $750 million order for a dozen helicopters from Italian defense group Finmeccanica, the defense ministry said on Friday, escalating its response to kickback allegations.

India has frozen payments for the AgustaWestland helicopters pending an inquiry, after Italian police arrested the head of Finmeccanica, Giuseppe Orsi, in connection with the case earlier this week.

Orsi, who has denied any wrongdoing, formally resigned on Friday.

"(The Ministry of Defense) today issued a formal show cause notice to AgustaWestland of UK seeking cancellation of contract," ministry spokesman Sitanshu Kar said.

"The operation of the contract has been put on hold. The company has been asked to reply to the notice in seven days," Kar said in a statement.

Political opponents and the media have lambasted the Indian government saying it should have acted sooner on signs that something was amiss in the helicopter deal, after an internal defense ministry investigation concluded nothing was wrong.

On Wednesday Finmeccanica appointed company insider Alessandro Pansa as Chief Executive, a position formerly held by Orsi.

AgustaWestland is a wholly-owned subsidiary of Finmeccanica.

(Reporting By Frank Jack Daniel; Editing by Ruth Pitchford)