The Board of Control for Cricket in India (BCCI) has suspended its tour of Australia pending the outcome of an appeal for suspended spinner Harbhajan Singh.
"The Board will appeal to the International Cricket Council to review the decision of the Match Referee and suspend its operation till the appeal is disposed of," the BCCI said in a statement released on Monday.
Harbhajan was suspended on Sunday by the International Cricket Council for three tests after being found guilty of racially abusing Australian all-rounder Andrew Symonds during the second test in Sydney.
Harbhajan has denied the claims and the BCCI said the tour would be suspended until his appeal had been heard.
"The Indian Board realises the game of cricket is paramount but so too is the honour of the Indian team and for that matter every Indian.
"To vindicate its position, the Board will fight the blatantly false and unfair slur on an Indian player," BCCI added.
The Indian team were due to travel to Canberra on Monday to prepare for their next tour match against an ACT Invitational XI but returned to their hotel rooms after boarding their bus.
"We have been instructed by BCCI to stay in Sydney until we get further instructions," team spokesman M V Sridhar told reporters at the hotel.
Cricket Australia chief executive James Sutherland had earlier told reporters in Melbourne that he expected the tour to proceed.
"The chairman of Indian cricket overnight made a commitment that it would and that's good enough for me," Sutherland said.
Sutherland has also proposed a peace meeting between Australia captain Ricky Ponting and Indian skipper Anil Kumble to try and resolve the escalating crisis.
Emotions began to boil over immediately after the match when Kumble accused the Australians of bad sportsmanship, evoking memories of Bill Woodfull's criticism of England during the 1932-33 'Bodyline' series.
The BCCI then announced it was lodging a counter-protest against Australian Brad Hogg, claiming he used abusive language at Kumble.
"In the course of the next few days it is time for the two captains to get together and have a chat," Sutherland said.
Australia's 122-run victory in the second test ensured they retained the Border-Gavaskar Trophy as well as equalling their own world record of 16 successive wins.
The remaining two tests of the series are scheduled to be held later this month in Perth and Adelaide.