MUMBAI - Indian sugar mills have been renegotiating and defaulting on contracts to supply 400,000 tonnes of the sweetener to overseas buyers as prices jumped after the government cut this year's export quota, five dealers told Reuters.

The renegotiations and defaults by mills in India, the world's second biggest sugar exporter, could support global prices.

Mills started selling sugar to trade houses in late August and signed deals to supply around 2 million tonnes of sugar for export even before New Delhi approved an export quota of 6 million tonnes earlier this month.

"A few weak mills that signed deals in advance are not honouring the contracts. They are threatening to default unless buyers are ready to renegotiate at higher prices," said a Mumbai-based dealer with a global trade house.

Four other sources confirmed the export agreements were renegotiated or defaulted on, declining to be named because of their companies' policy on talking to the media.

Two months ago mills in the western state of Maharashtra and neighbouring Karnataka sold sugar at around 34,000 rupees ($420) per tonne to trade houses, but now prices have moved above 37,000 rupees, prompting a few mills to walk away from the agreements, said another Mumbai-based dealer.

Indian sugar prices rose as the rupee depreciated to a record low and as global prices jumped after India allocated its 6 million tonne export quota, down from last year's exports of over 11 million tonnes.

Trade houses sold sugar to overseas buyers after signing purchase agreements with the mills, said a New-Delhi based dealer with a global trade house.

"They (trade houses) are now stuck. They can't renegotiate or default like mills. They have a reputation and to maintain that they have to incur losses on these deals," he said.

The defaults by mills in Maharashtra are forcing trade houses to make purchases from mills in the northern state of Uttar Pradesh, dealers said.

Indian mills have so far signed contracts to export 4 million tonnes of sugar during November to February, they said.

Traders were selling white sugar at about $490 a tonne free-on-board (FOB) this week, a discount to London white sugar futures, which were trading above $568 on Tuesday, dealers said.

Indian sugar was still the cheapest in the world, even after the recent rise in prices, the Mumbai-based dealer said.

India exports sugar mainly to Indonesia, Bangladesh, Iraq, Malaysia, United Arab Emirates, and African countries.

Many mills have stopped signing export deals after selling half of their allocated export quotas because they expect prices to rise further, said another New Delhi-based dealer.

"Flow from India is going to shrink in the coming months," he said.

($1 = 80.9220 Indian rupees)

(Reporting by Rajendra Jadhav; Editing by Susan Fenton)