French president Jacques Chirac

France’s dramatic U-turn is a victory for environmental pressure groups, particularly Greenpeace, which had challenged in French and Indian courts the legality of sending a vessel laden with toxic substances to be scrapped overseas.

Mr Chirac ordered the return of “Le Clem”, dubbed the “deathship” by Greenpeace, after the Conseil d’Etat, France’s highest administrative court, upheld the environmental group’s complaint that its voyage was against French law.

The Clemenceau affair had proved an unwanted distraction for Mr Chirac as he prepared to visit India this weekend with a business delegation keen to sell Airbus passenger jets, military hardware and nuclear technology.

The affair has damaged the reputation of Michèle Alliot-Marie, the defence minister and potential presidential candidate.

It came also as anger grows in India over opposition from some European governments to Mittal Steel’s bid for Arcelor, a matter almost certain to be raised with Mr Chirac in New Delhi next week.

On Wednesday, Kamal Nath, India’s commerce and industry minister, repeated on television his allegation that European countries were discriminating against Mr Mittal based on his “skin colour”.

The fate of the warship highlights the problem shipowners face finding an economically viable and socially acceptable way to dispose of old vessels. France’s state-owned DCN handles the scrapping of nuclear sub-marines but Europe has no shipyard capable of breaking large vessels. The US Maritime Administration is one of the most affected as it tries to dispose of its “ghost navy” of about 300 retired warships.

Jacob Hartmann, toxics expert at Greenpeace, welcomed the French government’s U-turn: “The environment won and they lost.”

Mr Hartmann argued ships should be broken in their countries of origin rather than transported to poor countries with inadequate facilities. “This is an opportunity – it could revive the European ship industry. Where you make ships, you have the expertise to break ships,” he said.

Mr Chirac on Wednesday ordered an inquiry into how much carcinogenic asbestos the vessel contained – one of the main areas of contention between the government and environmental groups. The confusion increased this week after the defence ministry admitted it had lost track of 30 tonnes of asbestos thought to have been removed from the ship in France last year.

Jacques Barrot, the EU’s transport commissioner who introduced a French ban on asbestos when he was a French government minister, told the FT: “We probably need to think of having a place capable of dealing with such asbestos work, which is challenging but can certainly be done if properly planned.’’

Martin Arnold in Paris, Jo Johnson in New Delhi, Raphael Minder in Brussels and Fiona Harvey in London