Here are the 10 big developments in the story:
US State Department spokesperson Marie Harf said, "We certainly take these types of allegations very seriously... We very clearly have said every year in diplomatic notes to every country that has diplomats here throughout the world that there are obligations they have for their staffs when they bring them to the United States. We make those obligations very clear and we take any allegations that they haven't done so very seriously."
This comes hours after senior US official Wendy Sherman spoke to India's foreign secretary Sujatha Singh and reportedly discussed specific steps to deescalate the matter and distanced the US administration from a statement made by US attorney Preet Bharara justifying the arrest.
This was Ms Sherman's second call to Ms Singh in 24 hours. It was a follow-up to a phone call made by US Secretary of State John Kerry to National Security Advisor Shivshankar Menon to express "regret" over the manner in which the diplomat's arrest was handled.
India has said it will accept nothing short of an apology. External Affairs Minister Salman Khurshid told NDTV in an exclusive interview, "We want more than a regret." He also said, "What was done is unacceptable." (Watch full interview)
In marked contrast to the regret expressed by Mr Kerry, Preet Bharara issued a statement saying that Ms Khobragade had been "accorded courtesies well beyond what other defendants, most of whom are American citizens, are accorded." He noted that she was served coffee and was allowed phone calls during detention and denied that she was handcuffed in front of her children. He did not, however, deny that she was strip searched.
Mr Bharara also said in his statement, "One wonders why there is so much outrage about the alleged treatment of the Indian national accused of perpetrating these acts, but precious little outrage about the alleged treatment of the Indian victim and her spouse?" He was referring to Sangeeta Richard, the domestic help that Ms Khobragade is accused by the US of exploiting. (Read: 'Agents brought her coffee', says Preet Bharara on diplomat's arrest)
Mr Khurshid was dismissive, saying "Who is Preet Bharara that we should take him seriously?" A spokesperson in the Ministry of External Affairs Syed Akbaruddin later rebutted Mr Bharara's statement and said, "There is only one victim in this case. That victim is Devyani Khobragade - a serving Indian Diplomat on mission in the United States. The action taken against her was not in keeping with the Vienna Convention." (Read)
Ms Richard's lawyer, meanwhile, welcomed the action against the diplomat. Speaking to NDTV, Dana Sussman also said that "India tried to silence and intimidate my client and her family."
After her arrest last week, Ms Khobragade was strip-searched, swabbed for DNA and cavity searched and was then placed in a cell with drug addicts. The US has accused Ms Khobragade of lying on the visa application for Sangeeta Richard and paying her less than minimum wages and forcing her to work for more than 40 hours a week.
India has informed the United Nations that Devyani Khobragade is now a member of the Permanent Mission of India to the UN, which will entitle Ms Khobragade to full immunity. The US State Department has to issue a new identity card that would give her this immunity. (Read: Diplomat transferred to UN Mission)