* (Updates with diplomat appointed to India's U.N. mission staff, paragraph 7)
By Shyamantha Asokan and Frank Jack Daniel
NEW DELHI, Dec 18 (Reuters) - India took retaliatory measures against the United States on Wednesday in a dispute over an Indian diplomat who complained of being stripped and forced to undergo "cavity searches" while in U.S. detention.
The measures included a revision of work conditions of Indians employed at U.S. consulates and a freeze on the import of duty-free alcohol.
Devyani Khobragade, a deputy consul general at the Indian Consulate in New York, was arrested on Dec. 12 on charges of visa fraud and underpaying her housekeeper, an Indian national. She was released on a $250,000 bail.
India has responded furiously to what it considers the degrading treatment of a senior diplomat by the United States, a country it sees as a close friend.
In an email to colleagues, Khobragade complained of "repeated handcuffing, stripping and cavity searches, swabbing" and being detained in a holding cell with petty criminals despite her "incessant assertions of immunity".
The email, reported in Indian media and confirmed as accurate by the government, caused outrage in India. With a general election due soon, politicians are determined not to be seen as soft on such an issue or unpatriotic.
Daniel Arshack, Khobragade's lawyer in New York, said India has now appointed her to its permanent mission at the United Nations in a move that Arshack maintained gives her full diplomatic immunity from prosecution "for acts before or after the appointment."
The U.S. prosecutor in New York could not immediately be reached for comment on whether the U.S. government would accept this move, or whether, as India maintains, the appointment would allow the charges to be cleared up quickly.
On Tuesday, authorities removed concrete security barriers that were used to prevent vehicles from driving at high speed near the U.S. embassy in New Delhi. The barriers would offer some protection against a suicide-bomb attack.
The U.S. Justice Department has confirmed that Khobragade was strip-searched. A senior Indian government source confirmed that the interrogation also included a cavity search.
"It is no longer about an individual, it is about our sense of self as a nation and our place in the world," Foreign Minister Salman Khurshid told parliament, whose usually fractious members showed rare unity on the issue.
Khurshid said work conditions of Indians employed in U.S. consulates would be investigated to root out any violations of labour laws, adding that there would be a freeze on the duty-free import of alcohol and food for diplomatic staff.
Several politicians argued that India provides too many perks to U.S. consular staff. Khurshid reined in some of these on Wednesday, saying passes giving such staff access to airport lounges had to be turned in by Thursday.
Supporters of a right-wing opposition party held a small protest near the U.S. embassy on Wednesday. About 30 demonstrators, some wearing masks of President Barack Obama and sarongs made from the U.S. flag, demanded an apology.
"It was very good that the government removed the barriers yesterday. Until the USA says sorry, we should not give any security at all to the Americans," said protester Gaurav Khattar, 33.
The U.S. State Department said it has told the Indian government it expects India to protect its embassy and stressed it does not want the incident with the diplomat to hurt ties.
The embassy did not respond to requests for information about what action would be taken to replace the barriers. The compound has several other layers of security and is protected by a high wall.
Status-conscious Indian dignitaries are often able to skip security checks and deal with legal problems discreetly in India. Less delicate handling abroad can be a shock.
A series of incidents in which politicians and celebrities have been detained or frisked at U.S. airports has heightened sensitivities about what is seen as harsh treatment abroad.
Shah Rukh Khan, one of Bollywood's best-loved actors, was detained at White Plains airport near New York City last year and at the Newark, New Jersey airport in 2009. Former president APJ Abdul Kalam was frisked on board a plane at New York's John F. Kennedy International Airport in 2011.
The Khobragade case is the latest concerning the Indian elite's alleged exploitation of their domestic workers, both at home and abroad.
Another official at India's consulate in New York was fined almost $1.5 million last year for using her maid as forced labour. Last month, the wife of a member of parliament was arrested in Delhi for allegedly beating her maid to death.
India says Khobragade's former housekeeper left her employer a few months ago and demanded help to obtain permanent resident status in the United States. She is thought to be in the United States but her whereabouts are not known.
One Indian government minister, Shashi Tharoor, has argued that it is not reasonable to expect diplomats from developing countries to pay the U.S. minimum wage to domestic staff because the envoys themselves earn less than that.
(Additional reporting by Chris Francescani in New York; Editing by Jackie Frank and Will Dunham)