The Insat-4C satellite weighed more than 2,000kg and was expected to significantly enhance India's telephone and business communications.
It came a day after a test-fire of India's longest-range nuclear-capable ballistic missile ended in failure.
The Agni-III surface-to-surface missile crashed into the Bay of Bengal.
Setback
Television pictures showed the Insat-4C satellite being launched from the Sriharikota Space Research Centre in the southern state of Andhra Pradesh.
Seconds after lift-off, the satellite's launch vehicle veered sharply off course before disintegrating into a ball of fire and smoke. Debris from the satellite and its rocket fell into the Bay of Bengal.
Isro
India is hoping to break into the commercial satellite launch market
Emergency crews were immediately alerted. It is still not clear what caused the malfunction.
"A mishap happened in the first stage of the separation and it will be some time before we know what went wrong," Madhavan Nair, the mission chief, told reporters.
"We have to analyse the sequence of events to see what happened."
India has been hoping to break into the lucrative commercial satellite launch market, and correspondents say Monday's failure represents a setback for its ambitions.
The country is one of the world's largest operators of communication satellites and the disaster follows 12 successful launches.
Monday's flight was also supposed to set the stage for an Indian mission to the Moon.
On Sunday, the Agni-III surface-to-surface missile was test-fired off the coast of Orissa state but crashed into the Bay of Bengal without reaching its target.
Analysts say it has a range of more than 3,000km (1,865 miles) and could hit targets in China.
