"In light of the great uncertainty that now prevails, the Child Welfare Service cannot maintain that a move to India would be in the best interest of the children," said Gunnar Toresen, the head of the agency's local branch in the south-western Norwegian town of Stavanger.
The two children, aged one and three, were removed from their parents in May last year by the child welfare services, which deemed they were not receiving proper care, but refused to give more details, citing confidentiality.
The parents, Norwegian residents Anurup and Sagarika Bhattacharya, have rejected the allegations and initially claimed on Indian television that Norwegian authorities objected to their feeding the children by hand and sharing the same bed -- common practices in India where they are seen as part of the bonding between mother and child.
Earlier this week however, the father, Anurup, changed his story, telling Indian media: "It was not just cultural bias that prompted the CWS (child welfare service) to act. My wife has a serious psychological problem."
Anurup, who is now seeking custody of the children, told Tuesday's The Hindu newspaper he was speaking out after a row with his wife in which she allegedly attacked him, and that he had "concealed the seriousness" of problems within his family. His wife's version of events was not given.
A Stavanger court had been set to hold a hearing Friday on whether the initial deal to hand custody of the children to their uncle in India was in their best interest, but the child welfare services said the new developments "make it impossible to carry out the hearing."
"The conflict over the last few days have revealed that the necessary foundation for an agreement does not exist. The Child Welfare Service is no longer confident that the parties wish to enter into a genuine agreement," Toresen said in the statement.
"Even if the parents and the children's uncle should nevertheless now want to sign an agreement, the Child Welfare Service does not have sufficient confidence that an agreement would be fulfilled as intended, because the necessary consensus and understanding between the parties and their families does not exist," he said.
Norwegian authorities were worried, he added, "that the children could be caught up in a very unfortunate tug of war in India."