The government's move sparked mass protests in southern Andhra Pradesh
The opening day of a two-day strike by the supporters of a new state has brought violence to parts of India's southern Andhra Pradesh state.
Over 100 buses were burnt, and shops and businesses attacked overnight.
The strike was called after the federal government said the demand for a Telangana state would be considered after consultation with all parties.
Earlier the government had announced that it would allow the creation of Telangana irrespective of opposition.
An estimated 35 million people will live in the new state.
K Chandrasekara Rao of the Telangana Rashtra Samiti (TRS), which is spearheading the protest for a Telangana state, has resigned from the lower house of parliament, along with two other MPs from the region.
Fifty lawmakers from the Telangana region and belonging to the Andhra Pradesh assembly have also handed in their resignations.
The latest uproar and strike call followed federal Home Minister P. Chidambaram's statement on Wednesday evening that all political parties should be consulted before deciding on a new state.
Mr Rao has resigned from the parliament
Mr Chidambaran explained the government's change in stance by saying that the situation in Andhra Pradesh had "altered" since he had made an announcement earlier this month on the formation of a Telangana state.
He said a "consensus had emerged among political parties allowing the formation of a new state" when he made the announcement on 9 December.
"However, after the statement, the situation in Andhra Pradesh has altered. A large number of political parties are divided on the issue," Mr Chidambaram added.
"There is need to hold wide-ranging consultations with all political parties and groups in the state," he added.
INDIA'S NEWEST STATE
Population of 35 million
Formed from 10 districts of Andhra Pradesh, including city of Hyderabad
Landlocked, predominantly agricultural area
One of the most under-developed regions in India
Culmination of 50-year campaign
More than 400 people died in 1969 crackdown
Politicians from Telangana reacted sharply to Mr Chidambaram's statement, saying that the government had put the demand in "cold storage".
About 50 lawmakers from the region have handed in their resignations.
The move to form Telangana state has plunged Andhra Pradesh into crisis - lawmakers have resigned, and there has been sporadic violence.
Investors fear the protests will hurt Hyderabad, an IT hub of southern India and home to firms like Microsoft, Google and Dell.
Telangana region is spread over 10 northern districts of Andhra Pradesh.
Campaigners say Telangana's economic development has been neglected in favour of the richer and more powerful Andhra region - and that a new state is the only solution.
The last three new states in India were formed in 2000: Chhattisgarh was created out of eastern Madhya Pradesh; Uttarakhand was created out of the hilly areas of northern Uttar Pradesh, and Jharkhand was carved from Bihar's southern districts.
India currently has 28 states.