Ms Khobragade, Deputy Consul General at the Indian Consulate in New York, was reportedly arrested on the street while she was dropping her daughter to school. She was later released on a $250,000 bail.
She was arrested on the orders of Indian-born Preet Bharara, Manhattan's top federal prosecutor, who said Ms Khobragade had presented false documents for the woman who worked as a babysitter and housekeeper at her home in New York from November to June this year.
He alleged the woman, Sangeeta Richard, had been exploited and made to work for "less than fair" wages. "This type of fraud on the United States and exploitation of an individual will not be tolerated," he said.
Ms Khobragade, 39, who has two young daughters, is in charge of Political, Economic, Commercial and Women's Affairs at the consulate. The charges against her carry a maximum sentence of 15 years in prison.
India has asked the US to resolve the matter with "sensitivity", taking into account Ms Khobragade's diplomatic status. In a statement, the Indian embassy in Washington said Sangeeta Richard had been "absconding since June" and faces an arrest warrant for cheating and extortion. (read)
Sangeeta Richard has alleged that she was to be paid $ 4,500 per month according to the employment contract furnished for her visa, but Ms Khobragade later changed it to $ 537 a month. She also complained that she was forced to work more than 40 hours a week.
Ms Khobragade's lawyers argue that with her own salary of $ 4,000 a month, she can hardly pay her help more than that. They also said her arrest on the street, without being given a chance to explain, was "shocking and unprecedented."