The government may cut customs duty on petrol and diesel by 5 per cent each to avoid increasing prices that had been necessitated due to a spurt in international oil prices.

Without the duty cuts, petrol prices would go up by Re 1 per litre and diesel by Rs 1.10 per litre, sources said.

As per a decision taken on Monday by Prime Minister Manmohan Singh, Finance Minister P Chidambaram and Petroleum Minister Mani Shankar Aiyar, customs duty on LPG and kerosene may also be halved to 5 per cent.

Besides, excise duty on petrol, diesel and kerosene may be reduced by 1-3 per cent to avoid raising prices of the politically sensitive commodities.

A notification cutting duties may come today.

Petrol and diesel, though not imported into the country, currently attract 20 per cent customs duty. This duty added to the landed cost of petrol or diesel, if they were to be imported, to arrive at the import parity price. Based on this import parity price, retail prices of the two auto fuels are fixed.

"A cut in customs duty would not have a direct bearing on state revenues as the India does not import fuel," sources said.

Oil companies had been demanding a raise of close to Rs 130 per LPG cylinder and Rs 3.5 per litre of diesel to make up for the losses they were suffering on account of rise in cost and cut in government subsidies.