In a letter to Reliance Capital, PwC said it felt compelled to withdraw from the audit of the company's fiscal year 2018/19 accounts after not receiving a "satisfactory response" to its queries on certain observations in its assessment, Reliance Capital said in a statement on Wednesday.

Shares in Reliance Capital have declined for two straight days after the announcement of PwC's resignation.

Reliance Capital said on Thursday PwC's move was driven by "fear psychosis" and that the company acted prematurely without even a statutory discussion with the audit committee.

PwC pointed out irregularities in the books of accounts of Reliance Capital and Reliance Home Finance around the alleged diversion of funds, and concerns with some related party transactions, the Economic Times on Thursday.

PwC said it does not comment on client-specific matter when contacted by Reuters.

Reliance, in its statement, rebutted the allegations, saying there was "no question of diversion" and that it had used all resources purely toward supporting its group debt.

Anil Ambani, chairman of the diversified financial services conglomerate, said in a conference call on Tuesday that the group companies were facing the brunt of "unwarranted rumor-mongering."

He said his companies had paid back 350 billion rupees ($5.05 billion) in the last 14 months and that he was committed to meeting all debt obligations in a timely manner.

In the last two years, Ambani has had to sell or put on block several assets to pare debt in his group companies.

PwC's resignation comes at a time when bankers and investors have raised concerns of a deeper malaise in the country's shadow banking sector after private home mortgage lender Dewan Housing Finance Corp Ltd's (DHFL) shares tanked last week following a sharp ratings downgrade.

The DHFL crisis followed the fall of a leading private NBFC, Infrastructure Leasing and Financial Services Ltd, in September. IL&FS's collapse roiled markets, spooked investors and prompted the government to step in and take control of the company to limit fears of a contagion.

Shares of Reliance Capital were down 6.2% and those of its sister concern Reliance Home Finance were 12.3% lower at 0745 GMT on Thursday, while the broader Nifty index was down 0.45%.

(Reporting by Promit Mukherjee in Mumbai and Derek Francis in Bengaluru; Editing by Subhranshu Sahu)

By Promit Mukherjee and Derek Francis