The UK government is giving pounds 10m to help fund the expansion at Bridgend, which fought off competition from Ford's factory at Valencia, Spain.
Engines for Ford's Mondeo are built at the Bridgend site, which will now start producing the Zetec 1.25-litre engine used in the new Fiesta being launched today at the London Motor Show.
Alex Trotman, Ford's chairman, said yesterday that he expected the Bridgend plant to produce another 550,000 engines a year from mid-1998, boosting total output beyond 1 million. He believed the "ripple effect" of the investment would generate another 600 jobs in the components industry.
"The UK is one of the most important production centres for Ford world- wide and our plants have improved their reliability and competitive position considerably in recent years," Mr Trotman said. Earlier this year Ford said it was investing pounds 200m in a new diesel engine programme at Dagenham.
The new Fiesta is being built at Dagenham and at Cologne, Germany. The Valencia factory, which already builds the Zetec engine, produces the old Fiesta, now called the Fiesta Classic, and has been chosen to build an even smaller Ford.
The UK is the largest producer of Ford engines outside America, and output last year from Bridgend and Dagenham topped 1 million. The Government's grant still has to be approved by the European Commission, which is currently considering the UK's aid to Ford's subsidiary Jaguar.
Ford said the money for Bridgend was "important" in deciding to invest in the UK, but emphasised that it was one of several factors. The Bridgend plant, opened in 1979 and now employing 1,300 people, had made great improvements in competitiveness and quality, underlined by the fact that it now makes Jaguar engines.
Despite sluggish UK new car sales, there is no shortage of confidence in Britain as a manufacturing base.Toyota has already committed itself to a big expansion of its Burnaston plant, Derbyshire, while Rover is due to make a decision about a new engine facility within six months. Nissan, Peugeot and Vauxhall all have expansion plans in the pipeline.