UPDATE 2-India may end fuel price curbs; cuts natgas tax

* India Budget: Govt to set up panel on fuel pricing

* India allows tax holiday on natural gas production (Adds comments from chairman of state-run ONGC, paragraphs 4,9)

NEW DELHI, July 6 (Reuters) - India, Asia's third-largest oil consumer, outlined plans in Monday's national budget to pull domestic fuel rates into line with global prices and waived tax on natural gas production to spur investment in exploration.

Finance Minister Pranab Mukherjee said the government would form an expert group to decide on a viable fuel pricing system in an announcement just days after India hiked petrol and diesel prices by as much as 10 percent after a recent rally in global crude prices. [ID:nSP514243]

"It is important to recognise that, with almost three-quarters of our oil consumption met through imports, domestic prices of petrol and diesel have to be broadly in sync with global prices of these items," Mukherjee said in his budget speech.

R. S. Sharma, chairman and managing director of state-run ONGC said: "One thing came out very clearly in the finance minister's speech, that the product prices here need to be aligned to the international market."

The government aims to develop a blueprint for long-distance gas highways to create a national grid of pipelines, Mukherjee said.

Mukherjee announced tax incentives designed to spur development of oil and gas pipelines across the country based on a common-carrier principle.

India's gas production is set to double by the end of the year as Reliance Industries' (RELI.BO) output from the D-6 block off the country's east coast reaches peak production of 80 million standard cubic metres a day (mmscmd).

In the last financial year's budget, India withdrew a seven-year tax holiday on natural gas production while allowing the benefit for oil production, worrying potential investors.

ONGC's Sharma said the extension of a tax holiday to natural gas would improve the bidding appetite for the country's oil and gas block exploration blocks.

"The Government was expected to clear this air of ambiguity that surrounded the tax holiday if it wanted to seriously draw foreign players into upstream exploration," said Praveen Kumar, Head of South Asia Oil and Gas Team, FACTS Global Energy.

For highlights, see: here (Reporting by Nidhi Verma in NEW DELHI; Additional reporting by Ami Shah in MUMBAI; Editing by Clarence Fernandez)