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The Andhra Pradesh assembly on Monday witnessed heated exchanges between the ruling Congress and opposition parties over the state's failure to bag a lucrative deal with German auto major Volkswagen.

The main opposition Telugu Desam Party (TDP) and Bharatiya Janata Party (BJP) alleged that Volkswagen had dropped its plans to set up a unit in the state last year because they were discouraged by corruption indulged in by the congress government.

The opposition staged a walkout even as Chief Minister Y S Rajasekhara Reddy denied the allegations and said a probe by the Central Bureau of Investigation (CBI) was on.

The government, launching a counter attack on TDP president N Chandrababu Naidu, said that it was he who had rolled out a red carpet for Volkswagen's tainted India representative Helmut Schuster and went on to describe him as "son-in-law of the house".

Shuster had arranged for state government officials to transfer about $2.4 million into a separate firm, Vashishta Wahan. Volkswagen, which had to pay back the money to Andhra Pradesh, had said that Schuster had "deceived" officials into paying the funds.

On Monday, the issue came up during question hour when Minister for Major Industries J Geeta Reddy said Volkswagen had conveyed to the government on August 21 last year its decision not to set up the facility in Andhra Pradesh. The firm had in November announced its decision to set up a plant near Pune in Maharashtra.

It had earlier agreed to set up the Rs 54 billion ($1.2 billion) plant to manufacture cars and light commercial vehicles (LCVs) in Visakhapatnam.

Geeta Reddy told G Kishan Reddy of BJP that the government had paid Rs 116.7 million in January 2005 towards equity in the proposed project to an Indian company (Vashishta Wahan) nominated by Volkswagen for the purpose.

The German firm in July the same year sacked Schuster and conveyed to the state government that it owned moral responsibility for the suspect dealings of its India representative.

She said that since a CBI inquiry was ordered into the matter, the government did not accept the money offered by Volkswagen. She claimed that CBI had recovered most of the money.

Both TDP and BJP wanted to know why the government paid money to Vashishta Wahan. Blaming the government for losing out on the prestigious project, Naidu said the corruption indulged in by the then major industries minister B Satyanarayana forced Volkswagen to drop its plans.

Naidu alleged that Satyanarayana even bought lands around the proposed location in Visakhapatnam.

Certain remarks by Naidu against speaker K R Suresh Reddy for interrupting him sparked a furore in the house with treasury benches demanding an apology. Trouble continued for more than an hour and the ruling party was satisfied only after Naidu withdrew his remarks.

While denying the allegations of any wrongdoings, the chief minister said he ordered a CBI inquiry immediately after the opposition demanded the same and also shifted Satyanarayana to the marketing department.

"We are ready to order an inquiry by the world's topmost investigating agency," he said and challenged TDP to submit evidence, if any, to the CBI to prove allegations against the government.