Dassault has declined to comment on the substance of the negotiations but has said it expects the deal to be signed before the end of 2013.
Dassault has agreed to supply manufacturing kits and equipment to HAL on time, but will not play a further role in manufacturing after that, the Indian Express newspaper said on Friday.
Negotiations between the company and the Indian government have completely stopped over the disagreement, the paper reported, without identifying its sources.
A Defence Ministry spokesman did not have any immediate comment.
According to a preliminary agreement between Dassault and the government, HAL will make 108 Rafale jets in India, while parts will be delivered by Dassault and its partners, Thales , Europe’s largest defence electronics group, and aerospace group Safran.
India, the world’s biggest arms importer, plans to spend about $100 billion over the next 10 years upgrading its mostly Soviet-era military hardware.
However, a recent push by the Defence Ministry to increase local manufacturing of military equipment has renewed concerns about whether Indian companies have the advanced technology and trained staff to build sophisticated defence equipment.
Dassault has previously expressed doubts about the technological capability of HAL to manufacture the Rafale. A HAL programme to manufacture advanced jet trainers is running years behind schedule.