Indian athletes are threatening to boycott next summer's London Olympics in an extraordinary stand-off with the head of the 2012 Games, Lord Coe, over his controversial sponsorship deal with a chemical company.

Lord Coe is under personal attack for signing the deal with Dow Chemical – under fire in India for its ownership of Union Carbide, whose Indian subsidiary was responsible for the Bhopal industrial disaster, one of the world's worst, estimated to have killed up to 25,000 people and injured over half a million.

The former Olympics minister Tessa Jowell, who worked closely with Lord Coe to win the Olympics for London, last night called on the former British Olympian to cancel the deal with Dow before the controversy irreparably damages the standing of the 2012 Games. Ms Jowell told The Independent: "There is a point at which you have to say you cannot take the reputational risk."

Lord Coe has one week to talk the Indian Olympic Association out of a boycott: on 5 December athletes and sports bosses in the world's second-most populous country will meet to vote on walking out of the London Games. Both the British and Indian governments will be asked to intervene to stave off the boycott as international outrage from politicians, athletes and human-rights groups mounts. A boycott by India, which does not boast a history of great Olympic success but has significant business and cultural links to the UK, would be a major embarrassment for Britain.

Dow is a core sponsor of the International Olympic Committee – a $1bn (£647m) deal that Lord Coe can do nothing about. But it is the London Games' recent awarding of a much smaller £7m sponsorship deal to Dow, allowing it to "wrap" the stadium in company fabric – and giving the chemical giant a global media profile next summer – that has outraged some athletes and politicians in India.

The chief minister of Madhya Pradesh, the state of which Bhopal is the capital, has demanded the Indian government support an athletes' boycott if the Dow deal continues. Shivraj Singh Chauhan said: "The funds intended for sponsoring the Olympics would be far better spent in alleviating the misery suffered by the people of Bhopal." He intends to take up the boycott with Sonia Gandhi, president of India's ruling Congress Party, while Ms Jowell travels to Delhi this week to seek views from ministers and athletes.

The 1984 gas disaster dogs Dow through its full ownership of Union Carbide Corporation, whose subsidiary Union Carbide India ran the Bhopal pesticide plant. Dow bought Union Carbide in 2001 and insists that the legal claims surrounding the incident were resolved long before it acquired the company – which the London 2012 organising committee accepts. Dow claims the $470m paid by Union Carbide in 1991 to the disaster victims was final, although this is being contested in the Indian Supreme Court.

Dow and Union Carbide are defendants in an Indian public-interest litigation case for clean-up of the factory site which campaign groups say continues to cause deformities and cancers among families using contaminated groundwater.

Other criticisms of Dow have included anger over its manufacture of the defoliant Agent Orange, used by the US in Vietnam. In 2010 India's government blacklisted Dow AgroSciences India for five years for bribing government officials. Dow AgroSciences is a wholly owned Dow subsidiary. In 2007 the US Securities and Exchange Commission accused Dow AgroSciences India Pvt Ltd of making "improper payments" between 1996 and 2001. Dow paid a civil penalty of $325,000 in 2007 without admitting or denying the allegations. Ms Jowell said: "I believe Sebastian Coe and Locog [the organising committee] want to do the right thing. It is not in their interest to have an association with a company with a record that is inconsistent with Olympic values.

"The unacceptability of Dow hinges on the continuing nature of the crisis for people who live in that area. It is better to have an unwrapped stadium than one wrapped in controversy."

The pressure from inside India is mounting. Aslam Sher Khan, an Olympic gold medal winner who became a politician, said the ongoing suffering in Bhopal made Dow's involvement in London "very concerning". He said: "The anniversary is coming up and the people of Bhopal are still shaken by what happened and the ongoing contamination. I am writing to Sonia Gandhi to put pressure on the British Government to rethink its association with this company."

Nobody from Locog was available for an interview but a spokesman said: "We have had absolutely no indication from the Indian National Olympic Committee that there are any plans or discussions to boycott London 2012".

Lord Coe has said: "I have looked at it very closely and I am satisfied that the ownership, operation and the involvement either at the time of the disaster or at the final settlement was not the responsibility of Dow."

Scot Wheeler, of Dow, said last night: "While it is understandable that human emotions evoked by the tragedy remain, allowing a misrepresentation of facts and to rewrite history – as some are trying to do – is not only wrong but sends an unfortunate and inaccurate message that obscures rather than clarifies the Bhopal tragedy.

"These attempts to misdirect responsibility do not change the fact that Dow has never had a connection with the disaster or its aftermath."

By Nina Lakhani