Work on Tata's flagship Nano – the world's cheapest car – ground to complete halt today for the first time amid increasingly fierce demonstrations over the allegedly illegal purchase of the land on which the factory to produce the £1,250 automobile is being built.

This week tens of thousands of protesters gathered at the partially-completed factory site in Singur in the state of West Bengal. They are complaining that about 400 acres was illegally taken from small farmers by the state's communist-led government, which then sold it to Tata.

Several thousand riot police had been drafted in to protect the controversial factory, which had been due to start producing the Nano in October amid fears the protests could turn violent.

The massive security presence did not quieten unrest, however, and last night scores of Tata workers were held under siege by angry protestors who refused to allow them to leave the site.

A Tata Motors spokesperson said: "Our workers are not attending work today".

The Nano's slated October launch date – designed to coincide with a prominent Hindu festival – now appears in jeopardy.

The activists gathered at Singur have said they will only call off their protest if the state government were to hand the land back to farmers -- a move that could derail the entire Nano project and would hugely embarassing for both Tata and the Indian government, which is trying to present the country as an emerging economuc superpower.

A week ago, Ratan Tata, the Tata chief executive, gave warning that he is ready to abandon the Singur plant if a long-running series of demonstrations did not abate. Such a decision would see up to $350 million dollars in investment written off by the company.

The demonstrations threaten to ruin the Nano's commercial debut -- one of the most closely watched proict launches in the auto industry in decades. Already there are fears that the car's ultra low-cost business model is in danger of being scrambled by sharp increases in raw materials and that Tata will make heavy losses on the first tranche of Nanos sold.

Indian analysts forecast that Tata will need to produce nearly 400,000 Nanos a year to make a profit, well above a planned initial capacity of 250,000 and any delay to production capacity coming online could prove hugely expensive.

Tata has not made any comment on the margins that it expects to make on the Nano. It has only said that the car will be profitable over the long term.

Times Recommends

• Gazprom brands Ukraine 'a barbarian' in gas row
• Services sector raises fears over UK jobless
• Retailers surge as profits survive sales plunge