NEW DELHI (Reuters) - India has agreed to allow oil marketing companies to procure ethanol by diverting an extra 800,000 metric tons of sugar for biofuel production, a government source said on Wednesday.

Concerns over sugar production due to below normal monsoon rains between June and September had led the world's second-largest to cap the amount that could be diverted for ethanol in the current season to end-September at 1.7 million metric tons.

But as the supply situation has improved as a result of unseasonal rainfall in Maharashtra and Karnataka, the government has agreed to the diversion of an additional 800,000 tons of sugar for ethanol production, said the senior industry official.

"Many sugar mills produced B-heavy molasses in anticipation of ethanol production. However, these stocks remain unused after the government capped the diversion of sugar for ethanol. Mills can now use stored B-heavy molasses for ethanol production," said the official, who spoke on condition of anonymity.

(Reporting by Mayank Bhardwaj and Rajendra Jadhav; Editing by Alexander Smith)