CAIRN Energy could see the $780 million (£500m) value of its remaining investment in India wiped out amid a tax dispute in the country that could drag on for ages, an investment bank has warned.

However, Cannacord Genuity said the problems in India should not stop Edinburgh-based Cairn making progress in areas such as the North Sea and Senegal and raised its target price for shares in the company.

In a note on Cairn, the bank's Charlie Sharp highlighted the scale of the challenge Cairn faces in India, where it made bumper finds under its founder Sir Bill Gammell.

The company was landed with a $1.6bn tax bill by Indian authorities in March in a retrospective move concerning events leading up to the flotation of Cairn India business in 2007.

Cairn insists it has paid all taxes due in India.

However, it has been prevented from selling its remaining 10 per cent stake in the Indian business. Mr Sharp noted this has a value of around $780m.

Cairn sold a majority stake in the former subsidiary to India's Vedanta Resources for $5.5bn in 2011.

Mr Sharp said: "The ongoing dispute could, at worst, see the effective loss of all Cairn's Indian asset value ... in our view."

He added: "Although we don't believe the result should impact the rest of the company's operations, we anticipate outcome uncertainty for an extended period."

Mr Sharp said the bank assumed a settlement for $500m, but had no insight into the timeline or result.

Cairn has been lobbying hard in India to achieve a resolution to the dispute.

It may face fresh complications there amid reports that Vedanta is planning to merge with Cairn India. This would allow Vedanta to access cash held by Cairn India to reduce its borrowings, potentially affecting the value of the minority stake.

Cairn Energy did not comment.

Mr Sharp highlighted the progress Cairn has been making in other areas under the leadership of Simon Thomson, who succeeded Sir Bill as chief executive in 2011.

Cairn made two significant discoveries off Senegal last year on acreage it acquired under Mr Thomson.

Mr Sharp described the SNE find as high class. He said the FAN discovery was more complex but noted the area concerned held further prospects.

Cairn highlighted its confidence in the Senegal programme last week when it emerged the company had shelved plans to explore for oil off the island of Ibiza following opposition from celebrities including Kate Moss.

Mr Sharp noted Cairn has funding in place to continue operations until two giant fields in North Sea it has interests in start production.

Cairn expects to generate significant amounts of cash from the Kraken field off Shetland and Catcher east of Aberdeen from 2017.

The company acquired interests in both under Mr Thomson's strategy of combining potentially transformational exploration in places like Senegal with lower risk activity in the North Sea.

Maintaining a hold rating on London-listed Cairn's shares, Mr Sharp raised his target price to 205p from 175p.

Shares in Cairn Energy closed up 3.7p at 188.8p.