Regulators in Brussels are examining whether an pounds 80m UK government contribution towards Jaguar's costs should be blocked as anti-competitive.
The investment, to build a new medium-sized Jaguar, is the largest in the UK motor industry this decade. It would not only generate about 6,000 jobs but secure Jaguar's future in Britain.
Ford, Jaguar's parent, threatened to build the car in America unless it received pounds 80m in grants. Despite considering the aid package for four months, the European Commission said yesterday that it had still not decided whether it should be approved.
Brussels regulators are coming under increasing pressure to block subsidies, having been roundly criticised over allowing aid for the airline and steel industries.
The Department of Trade and Industry yesterday insisted that it did not expect any problems about approval from the commission. But Karel Van Miert, competition commissioner in Brussels, said: "We are looking at the case. We have no firm opinion yet.'' Although he believed that some of the aid might be justified, he added: "I am not in a position to judge whether the amount can be accepted or not.''
Jaguar intends to build a production plant in Birmingham to make a car, code-named X200, to challenge medium-sized Mercedes and BMW vehicles.
Ford is being given pounds 48m of regional selective assistance and the remainder in grants and benefits from agencies and local authorities.
The DTI said that the conditions attached to giving selective assistance - job creation in a high unemployment area and viability of the project - were well within Brussels' criteria. "This is not a subsidy for an uneconomic project,'' said the DTI.
Mr Van Miert, attending a conference in London yesterday, could give no indication of when a decision on the aid could be taken. Other motor manufacturers have queried the legitimacy of the grant. A director of a Japanese car company in the UK told the Independent this week: "How they could get this through the competition regulators is a mystery to me.''
Ian Lang, the new Trade and Industry Secretary, defended the decision to grant aid, arguing that Jaguar had not been "bailed out" with taxpayers' money.
The expansion will create about 1,300 jobs at Jaguar's Castle Bromwich plant in Birmingham and at Ford's plant at Halewood, Merseyside, which will be responsible for body pressings.
It is also estimated that building the new car will create a further 5,000 jobs in the UK motor industry.
The new car is scheduled to go into production in 1998/99, eventually turned out at a rate of 100,000 a year, compared with Jaguar's existing annual output of about 50,000. About 45 per cent of sales would go to America. Prices are expected to start at about pounds 25,000.
The investment should help reinforce a recent recovery in Jaguar's fortunes as the company is this year expected to make its first profit since it was purchased by Ford in 1989 for pounds 1.6bn.
Jaguar has lost almost pounds 800m over the last six years due to recession, but in the first six months of this year sales rose 37 per cent, with sales in the US up 28 per cent.
Garyl Rhys, motor industry professor at Cardiff University, said: "Without this investment, Jaguar would probably have withered away in about 10 years time. This is a renaissance for Jaguar.''
Jaguar, which began life in 1992 as a motorbike sidecar maker, needs to produce a car with wider appeal if it is to survive. Jonathan Storey, of European Automotive Research, believes Jaguar could make a serious dent in a vehicle class currently dominated by German manufacturers.
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