Mandelson and Treasury at odds over bailout for Jaguar

Bridging loan considered but Darling fears dangerous precedent could be set

The Government is edging towards an emergency rescue package for Jaguar Land Rover in an attempt to protect tens of thousands of manufacturing jobs.

The luxury car firm employs 15,000 workers in the West Midlands and a further 60,000 other jobs in the region rely indirectly on the firm.

Ministers insist that its Indian parent company, Tata, must take prime responsibility for its financial health. But they also admit that Jaguar Land Rover cannot be allowed to fail because of its importance to the UK economy and its research and development expertise.

The company – whose profits have collapsed in the past six months, forcing it to lay off 850 staff – is seeking up to £1bn of state assistance to tide it over the next 18 months. There is no question of the firm being given a blank cheque, in the form of a subsidy or of state investment, but ministers are considering offering a bridging loan or credit guarantees to Jaguar, which was bought earlier this year by Tata for £1bn.

The Government is likely to offer Jaguar short-term help, amounting to tens of millions of pounds, within the next week to maintain its cash flow. That would be followed by a detailed agreement in the new year to underwrite its loans with state money. News of the talks emerged after Tata said it was to sponsor Ferrari's Grand Prix team for an unspecified sum.

Contacts between Jaguar and two Whitehall departments – Business, Enterprise and Regulatory Reform and the Treasury – have intensified in recent days. Ministers are also talking to other struggling car manufacturers, including Vauxhall, and the Society of Motor Manufacturers and Traders.

Their plight was underlined bythe society's figures, published yesterday, showing production in Britain has slumped by one-third. More than 97,600 cars rolled off UK production lines last month, a fall of 33 per cent since November 2007. Commercial vehicle production fell by 50 per cent as cash-strapped companies cancelled orders for vans and lorries.

Jaguar has told ministers it is a healthy and viable business – making a £327m profit last year and a £310m profit in the first half of 2008 – but has asked for help guaranteeing "short-term liquidity" because the major banks are reluctant to lend cash during the downturn.

Business ministers are understood to be sympathetic to Jaguar's pleas for one-off help. The Treasury is more sceptical,concerned over whether it would set a dangerous precedent by offering the car maker a lifeline in the week that the retail chain Woolworths announced the closure of 800 shops.

Yesterday, Lord Mandelson, the Business Secretary, acknowledged that Jaguar faced some "immediate financial pressures" but insisted he was not going to be "bounced into a decision on this or any other company".

He said: "We have to take stock and form a very tough appraisal of the particular circumstances of any company that's coming along to us for assistance. So if, in the immediate term, there is some bridging, a help that we can offer, then we would consider it."

The Government fears that advanced technical skills could be lost to Britain if Jaguar, which spent £400m last year on research and development, was forced to sack staff.

Ministers are also conscious of several marginal parliamentary seats in the West Midlands. Seven constituencies – including Redditch, held by the Home Secretary, Jacqui Smith – would fall to the Conservatives with a swing of 5 per cent. Another three would be captured by David Cameron if the swing is 10 per cent.