By Munsif Vengattil and Sai Ishwarbharath B

NEW DELHI, May 1 (Reuters) - Indian software firm Zoho has suspended its year-long pursuit of a $700 million plan to foray into chip manufacturing, sources familiar with the matter said, dealing another blow to the Indian government's ambitious semiconductor plans.

Zoho struggled to find the right technology partner required to advise on the complex chipmaking processes, one of the sources said.

Reuters reported on Wednesday that Indian billionaire Gautam Adani's group has also paused discussions with Israel's Tower Semiconductor TSEM.TA for its $10 billion chip project following an internal evaluation by the Indian group.

Zoho, valued at around $12 billion, offers cheaper alternatives to cloud-based software tools made by the likes of Microsoft. Its billionaire co-founder Sridhar Vembu is known for his popular and unconventional approach of locating business operations in rural villages.

In a bid to diversify, Zoho planned to invest $400 million in a semiconductor facility in Karnataka state in south India.

Vembu has said that the technology was vital for the nation.

"Zoho could not find a tech partner despite an extensive search," said one of the sources.

The entire chipmaking plan, first reported by Reuters in May 2024, has for now been suspended, said the two sources, who declined to be named as the decision is not public.

It was not clear if Zoho will decide to revive its plans if a partner can be found. A Zoho spokesperson declined to comment.

Representatives for Karnataka state did not immediately respond to a request for comment.

Zoho's retreat will be a setback to Prime Minister Narendra Modi who has for several years tried to lure companies in his pursuit to make India a global chip manufacturing hub.

India does not have a single operational chipmaking facility.

Zoho, established in 1996, offers software and related services on subscription to businesses in 150 countries and has over 18,000 employees and more than 120 million users.

Zoho's Silectric Semiconductor Manufacturing last year made a handful of hires and a formed a board to oversee chipmaking efforts, the source who gave the reason for the failed plan said.

India's Karnataka government said in December it had given a landmark approval to Zoho's planned $400 million facility in Mysuru region, which would have generated 460 jobs and been the first such project in the state.

(Reporting by Munsif Vengattil and Sai Ishwarbharath B; Editing by Aditya Kalra and Elaine Hardcastle)

((munsif.vengattil@thomsonreuters.com;))