Sources close to the talks told the Guardian the prime minister had rejected the idea of an "early harvest" deal, which could have cut tariffs on goods such as whisky but would not have dealt with trickier subjects such as professional services.
The decision scuppered any chance of agreement before Sunak meets his Indian counterpart, Narendra Modi, at the weekend.
Many now believe a deal is impossible before the countries hold general elections, next year in India and by January 2025 in the UK, although some in government still believe it could be reached this year.
A government source said: "There was talk last year of a deal by last Diwali, but that was only going to happen if it was a shallow deal based around a limited number of goods. Kemi Badenoch [the trade secretary] and Rishi Sunak have decided they don't want to go down that route so have taken a deadline off the table."
Another person close to the negotiations added: "India wants to do an early agreement on goods, but the risk is that instead of being the start of a wider trade agreement that becomes the end point and the UK doesn't get any of the more fundamental things it wants."
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