The actor is reportedly angry that Varma cast newcomer Puneet Israni in the main role.
A source told the Hindustan Times: "The word is that John has pulled out. The original was a super-hit, and whenever anyone thinks of making a sequel to a big film, they usually opt for big stars.
"Perhaps initially there was supposed to be a mix of big stars and newcomers, but as time passed, Ramu settled for an all-new cast. This didn't go down too well with John."
However, Varma has denied the rumours that there have been creative differences between the pair.
"These are all media-created rumours. John is definitely producing the film," he told the paper.
In April, Abraham said that he was fed up of how the Indian film industry is driven by big-name actors.
The 39-year-old star's first production Vicky Donor resulted in an increase in sperm donation across India.