Defence Minister George Fernandes said that Osama bin Laden was in hiding in Pakistan, drawing an immediate denial from Islamabad.
"We have information the man is around and he is somewhere in Pakistan. We had it from unimpeachable sources," George Fernandes told Britain's Channel Four News.
A spokesman for Pakistan's President Pervez Musharraf told the programme it was "Indian propaganda" and said Fernandes was "talking through his hat".
The United States blames Bin Laden and his al-Qaeda network for the September 11 attacks on New York and Washington.
Fernandes said the last sightings of Bin Laden in Pakistan had been three months ago but there was "no reason to believe that the situation has changed".
Asked whether Musharraf knew of the situation, Fernandes said: "The Pakistani intelligence -- the ISI -- know where he is. General Musharraf is the commander in chief of the armed forces and the ISI reports to him."
But Fernandes added: "The ISI is capable of doing its own thing. I can't say therefore for certain whether Musharraf knows about the man."
Earlier this month, Abdel-Bari Atwan, editor of the London-based Arab newspaper al-Quds, who has close ties to Bin Laden's associates, said they had told him the Saudi-born militant was alive and planning another attack on the United States.
Bin Laden made a series of defiant videotaped broadcasts on television as U.S. warplanes pounded Afghanistan to destroy al-Qaeda and the Taliban. But recently, he has stayed out of sight, raising questions over whether he survived the bombing.
Last week, US Defence Secretary Donald Rumsfeld said the United States still did not know if bin Laden was dead or alive.
Musharraf's spokesman Major General Rashid Qureshi told the programme: "Frankly, it's typical of Mr George Fernandes to talk through his hat."
"This is a typical example of Indian
propaganda which is meant just to discredit Pakistan. If there had
been any evidence of the whereabouts of Osama bin Laden I'm quite
confident...the United States would have been the first to know,"
he added.