Jaguar Land Rover owner Tata Motors is demanding more than £500mn of government aid for a new battery factory in Britain, in a decision set to be “pivotal” for the future of the UK car industry.

People briefed on discussions say the Indian group is close to choosing between Spain and south-west England for its plant and has given UK ministers “weeks” to pledge financial support.

They added the total value of UK aid sought by Tata exceeds £500mn, including grants and support packages such as assistance for energy costs and research funding.

The move, by the largest employer in the UK car manufacturing sector, presents the government with a fundamental choice over how much support to give the industry as Britain struggles to make the transition from petrol and diesel cars to mass-market electric vehicles.

A UK government official said: “We . . . are engaging with them — whether or not the talks go anywhere depends on whether a final amount can be agreed.”

A decision by JLR not to source batteries in the UK would be a body blow to the British automobile sector, damaging the country’s international appeal to investors, according to industry leaders. 

“This is pivotal . . . it would send a seismic signal internationally” if the Indian company opts to build its factory outside the UK, said one person familiar with Tata Motors’ request for British government support. 

The group has significantly increased the amount of state support it is seeking since talks with the government began, said people close to the negotiations.

“This is very difficult for the government,” said one. 

Tata is examining a partnership with Chinese battery maker Envision that would involve the Asian group building and running a factory in Somerset to supply JLR’s new range of electric cars.

PJ Balaji, Tata Motors’ finance chief, said last month the Indian company was considering a site for battery making “in Europe”.

Spain, Tata’s European alternative to the UK site, already has pledges to build battery factories from German carmaker Volkswagen and start-up Inobat.

JLR and Tata Motors, part of Tata Group, declined to comment. Envision and the UK business department also declined to comment.

Despite new investments by Nissan, Stellantis and Ford in electric vehicle technology, the UK has struggled to attract big battery companies to set up factories.

UK car production dwindled last year to its lowest level since the 1950s, following the closure of Honda’s plant in Swindon. 

The government has set aside £850mn to attract battery makers to the UK, and has several other financial support schemes it could draw on to entice investors.

Ministers provided more than £100mn to Nissan for electric investment at its factory in Sunderland. Stellantis received about £30mn from the government to make electric vans in Ellesmere Port.

Britishvolt, the start-up that wanted to build a battery factory in Northumberland, had been offered £100mn of state funding before its collapse this year. 

Compared with rivals, JLR is late to launch a range of electric vehicles. The group currently has only one electric car — the Jaguar I-Pace, which is made in Austria by contract manufacturer Magna Steyr. 

JLR has said it will launch an electric Range Rover, its flagship model, next year. 

JLR and Envision, which makes batteries for Nissan in Sunderland, came close last year to announcing a partnership to build the battery factory in Somerset. 

But Tata delayed an announcement amid political turmoil as Boris Johnson was replaced as prime minister by Liz Truss and then Rishi Sunak.

The decision was also held back because Tata Group has been simultaneously seeking British government support for its UK steel business. 

Ministers have offered about £300mn to try to keep Tata’s Port Talbot steel works open.