India's demand for steel is growing rapidly

This will be the second biggest foreign investment in India's steel sector.

The company will also study the possibility of setting up a 2,400 megawatt capacity power plant and a township for employees.

India's demand for steel is growing rapidly, with increased demand for cars, fridges and building materials.

'Good infrastructure'

The chairman of Mittal Steel, UK resident LN Mittal, said the project would be developed in two phases of six million tonnes each.

The first phase is expected to be completed within 48 months of the agreement of the detailed project report and the second within another 54 months after completion of the first phase.

"Steel consumption in India is said to experience considerable growth over the next decade and therefore it is a natural market for Mittal Steel to build a production presence," said Mr Mittal.

"Jharkhand is well known for its raw material reserve and good infrastructure and it is an excellent location for setting up this type of green field venture."

He also said there was no need to export or import iron ore since there was enough available in Jharkhand, the Press Trust of India news agency reports.

The project will be developed in two phases

The company said a final agreement would be signed after completion of a detailed project report.

South Korean steel maker POSCO decided to invest $12bn in the eastern Indian state of Orissa earlier this year.

India has been slow to open its markets to foreign investment, and privatisations in key industries, such as oil and heavy engineering have proved politically sensitive in recent years.

India's demand for steel is growing rapidly as strong economic growth has increased demand for cars, fridges and building materials.

The market for steel is also strong elsewhere in Asia, particularly in China, contributing to high steel prices in the last two years.

Tata, one of India's top producers, earlier this year clinched a deal to invest up to $1.2bn to build three steel plants and develop iron ore mines in Iran to boost supplies to India.