MUMBAI - India has decided to allow sugar mills to divert up to 1.7 million metric tons of sugar for ethanol production, government and industry officials said on Friday, as New Delhi aims to reduce disruptions in its ambitious biofuel program.

As the world's second-biggest sugar producer, India had previously directed sugar mills not to use cane juice or syrup for ethanol due to concerns over production as drought hit key producing states like Maharashtra and Karnataka.

However, on Friday, the government opted to permit the diversion of cane juice and B-heavy molasses for ethanol production, capping it at 1.7 million metric tons for the 2023/24 marketing year started on Oct. 1, according to officials.

"A quota will soon be allocated for sugar mills and distilleries," said a senior government official, who preferred not to be named, following official rules.

The available sugar supply would still be adequate to meet local demand, even with the diversion of sucrose for ethanol production, the official added.

The government move will assist the industry, which has invested billions of dollars over the last five years to boost ethanol production capacity, said a senior industry official, also preferring anonymity.

Uneven rainfall in the primary sugar cane-growing states of Maharashtra and Karnataka has sparked concerns about this year's output.

Anticipated production decreases have driven local sugar prices to their highest levels in nearly 14 years.

(Reporting by Rajendra Jadhav; Editing by Bill Berkrot)