The Department of Telecom (DoT) issued the ultimatum saying it would terminate services if RIM did not either provide the encryption keys or locate its servers in India. The Government is thought to be concerned about the possibility of terrorists using the devices to communicate.
The threat was reported on Friday in leading Indian newspaper The Economic Times (ET), which quoted anonymous attendees of a meeting last Thursday between The Department of Telecom, RIM and the Canadian High Commission.
Sources said the DoT had instructed RIM that Thursday's meeting may be the last on the subject, and that RIM would have to come back with a solution to avoid a ban.
The dispute has been ongoing for at least two months, and RIM's response has been stubborn. The company said in a statement released in May that it did not hold encryption keys, and that moving some of its servers to India would not give third parties any better access to users' data.
The Indian Government seems not to be accepting that argument, saying that investigators at the Federal Communications Commission, the US regulator, have access to users' data.
While RIM does not appear to be backing down over the encryption keys, it may be ready to compromise on the location of its servers.
An executive at one of India's five BlackBerry service providers told ET that there is an unresolved issue with regards to the costs of moving its servers to India. The executive said: "RIM does not want to bear this cost. Ditto with service providers".
A rival Indian newspaper claimed on Saturday that a termination of BlackBerry services was unlikely. The Hindustan Times quoted the DoT's secretary Siddhartha Behura as saying: "There is no problem with the BlackBerry handsets or services and BlackBerry services are not going to be discontinued in India."
Meanwhile it was revealed yesterday that the Irish Government has banned BlackBerry devices from one of its departments over fears of interception.
Officials in the Department of Foreign Affairs in Dublin will not be allowed to use the devices, even though other departments have been given the go-ahead.
"It could pose a threat if emails containing the itineraries of visiting VIPs got into the wrong hands," an Irish Government source told The Press Association.
The French Government has already banned Parliamentarians from using BlackBerries because of the threat of its data being intercepted.
The British Government has a more lenient approach, allowing restricted data to be sent and received using the devices.