The Department of Trade and Industry has offered the US car giant incentives to locate a pounds 600m production line for its new mid- range Jaguar, the X200, in Britain.
The plant could create more than 10,000 jobs and the aid package under discussion is thought to be worth more than pounds 50m, one of the largest in recent years.
However, the European Commission warned yesterday that if successful the proposal would be closely scrutinised in Brussels and might well fall foul of the European Union's increasingly tough anti-state subsidy rules.
State handouts are restricted under Article 85 of the Treaty of Rome. The Commission can grant dispensation under special circumstances, but a spokesman for the Commission signalled that that the new plant was unlikely to qualify.
'That is only usually done in the context of restructuring a company close to collapse to protect jobs and keep the company going,' the spokesman said.
Michael Heseltine, President of the Board of Trade, would face a tough struggle to gain an exception to help a profitable American company fund a new production line, he added. 'What justification would he have to put state money into Ford?'
The aid is vital, however, if Ford is to be persuaded to build the plant in the UK. Alex Trotman, Ford's chairman, recently made it clear that he would site the new production facilities in the US unless the UK could match the generous incentives on offer there.
If the Commission were to block the aid, it would prompt a bitter row, given that only three months ago it authorised a a Fr20bn ( pounds 2.4bn) capital injection for Air France, the loss-making carrier, by the French government.
That decision caused outrage in Westminster. A spokesman for the UK Department of Transport said he did not believe the Air France aid was compatible with the Treaty of Rome. British Airways and British Midland voiced their determination to fight the Commission's decision in the European Court of Justice.
Karel van Miert, the Commissioner responsible for competition policy, who will scrutinise the proposal, was also responsible a year ago for forcing British Aerospace to repay pounds 57m of sweetners it received when Lord Young clinched the sale to it of the Rover car group in 1988.
Tory MPs predicted the Ford plans would cause a furore at this week's Conservative party conference in Bournemouth, where Mr Heseltine will lead the debate on trade, industry and energy.
Some MPs, however, disapprove strongly of Mr Heseltine's interventionist approach, especially given that Ford made profits in 1993 of dollars 2.5bn ( pounds 1.7bn). 'I do not like to see British Government money subsidising a private venture like this,' said Dr Rhodes Boyson, Conservative MP for Brent North.
'Governments have shown bad judgement when it comes to this kind of project. They should concentrate on cutting expenditure, not raising it.'
City analysts said the Government would suffer acute embarrassment if production of one of Britain's most prestigious manufactured goods was lost to a foreign factory.
'I should think they will do everything they can to keep production in this country,' said Sandy Morris of County NatWest.