The firms became partners when Vodafone bought out Hong Kong-based Hutchison Whampoa's 67 percent stake in Hutchison Essar for $11.1 billion in 2007 as it sought to make India a crown jewel in its expanding emerging markets portfolio.

But friction between Vodafone and the Essar Group, founded by billionaires Shashi and Ravi Ruia, became more public in recent months over the valuation of Essar's minority stake.

Vodafone's pact with Essar gave the Indian conglomerate an option to sell its stake in Vodafone Essar, as India's third-largest mobile phone company was renamed, to the British firm for $5 billion.

The deal will result "in a total cash payment of $5 billion" to the Essar Group and "final settlement is anticipated to be no later than November 2011," Vodafone said in a statement.

"Now Vodafone does not have to worry about relations with an alternative party," said Guy Peddy, an analyst at Macquarie Securities in London.

Vodafone said the purchase of Essar's stake would not affect its accounts as the $5 billion had already been included in the British firm's net debt.

Essar did not comment on the transaction.

The agreement will give Vodafone 75 percent of Vodafone Essar, which has 130 million subscribers, just above the 74 percent cap foreign firms can hold in Indian telecom companies.

Vodafone said it would comply with local regulations, without elaborating.

But the company may have to look for another Indian partner or undertake a stock flotation in order to remain compliant with Indian law, analysts said.

Relations between Vodafone and Essar had become fraught as Essar sought to restructure the ownership of the mobile firm in a manner that Vodafone said could artificially inflate the company's value.

There been difficulties in their relationship from the start after the Indian group initially sought joint control of the venture but later agreed to allow Vodafone to manage the operation.

Vodafone's foreign investment, intended as a move to offset its saturated mobile markets in Western Europe, remains the largest to date in India.

But the company has had a rough-and-tumble ride with its investment in India amid intense competition in the world's fastest-growing mobile market which has more than 770 million cellular subscribers.

It wrote off 2.3 billion pounds ($3.7 billion) in 2010 citing the ferocious rivalry among the myriad players in the Indian market that has driven call costs to below one cent a minute and soaring spectrum charges.

Vodafone is also fighting a $2.5 billion Indian tax bill stemming from its purchase of Hutchison Essar.

India's tax department is demanding the money from Vodafone, saying it failed to withhold tax when paying for Hutchison Whampoa's stake.

Vodafone and some other Indian mobile firms also could be forced to pay more than $1 billion each to the government for alleged undervaluation of second generation mobile licences sold in 2008, according to government officials.

The cut-rate sale forced the resignation of India's telecoms minister and has embroiled the Congress-led government in massive controversy.