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Cairn Energy has announced plans to sell a maximum 51% of its Indian operations to mining group Vedanta for up to $8.5bn (£5.4bn).

Edinburgh-based Cairn said the deal would result in a "substantial return of cash" to shareholders.

It added it would also use the cash from the proposed sale for other exploration and drilling programmes.

Cairn India has a market capitalisation of $14bn and is the fourth largest oil and gas company in India.

Shares in both companies rose after the annoucement, with Vedanta ending the day up 4.8% and Cairn up 5.3%.

"I am delighted to announce the proposed disposal of a significant shareholding in Cairn India in line with our objective of adding and realising value for shareholders," said Sir Bill Gammell, Cairn's chief executive.

Last week, Cairn confirmed it was in talks with Vedanta to sell its Indian interests, which include one of the country's biggest oil and gas production developments in Rajasthan.

Vedanta's executive chairman Anil Agarwal said: "The proposed acquisition significantly enhances Vedanta's position as a natural resources champion in India.

"Cairn India's Rajasthan asset is world class in terms of scale and cost, delivering strong and growing cash flow".

Analysts said the deal demonstrates Vedanta's desire to become a major player in the oil and gas sector. It currently specialises in metals production.

"With this deal, Vedanta is looking to become a company with the scale of something like [mining giant] BHP Billiton," said Alex Mathews at Geojit BNP-Paribas Financial Services in Kerala.

"It shows the company wants to be become a major resources player."