It was only unveiled last month and won't hit India's road until October, but Tata's diminutive Nano, the world's cheapest car, has already sent prices on the country's second-hand lots sharply into reverse.

With small cars accounting for more than 75 per cent of second-hand sales in India, prices of used basic models have plummeted by as much as a third in a matter of weeks, according to dealers.

"The Nano is having a very large impact on sentiment," Arif Fazulbhoy, director of Fazulbhoy Motors, one of Bombay's largest dealerships, said. "Tata did a great job in marketing it, people know they will be able to book one soon, and now buyers are happy to sit on the fence."

Designed to replace the cheap two-wheelers that swarm India's streets, the 33bhp two-cylinder Nano is priced at 100,000 rupees (£1,250), excluding taxes. The base model will cost about 130,000 rupees on the road - a sum that would buy a stereo system for a BMW.

According to Mr Fazulbhoy, the price of a second-hand Maruti 800, a model first launched in 1984 and a stalwart among India's very cheapest cars, has fallen by about 30 per cent since the Nano's launch at the Delhi Auto Expo on January 10. A five-year-old 800 now goes for about 75,000 rupees, compared with about 110,000 rupees in December.

Behind the woes of India's Arthur Daleys stands the unprecedented media coverage garnered by the "people's car".

Tata said last week that the website it built to promote the Nano, which has been lauded in the Indian press as the country's first entirely home-grown automobile, received 10 million visitors last month, a figure the manufacturer claimed as a record. Observers say this "Nano effect" will prove crucial in India, a market where a consumer can easily dwell on a potential car purchase for a year.

"People are asking themselves – and us – why they should pay, say, 250,000 rupees for a new Maruti Alto, when they can wait and get a brand new Nano for less in a few months' time, a car that is actually bigger," Darius Lam, of the Indian edition of Autocar Professional, said.

Manufacturers are also being hit directly, with year-on-year sales of new Maruti 800s down 20 per cent in January – a month in which the start of a new registration year usually gives sales a boost.

Analysts expect more downward pressure as more manufacturers join the race to build budget runabouts for the emerging middle classes of Asia's developing economies – a trend that will worry environmentalists who have already attacked the Nano's potential to boost CO2 emissions.

The Renault-Nissan alliance is working on a potential £1,599 car in partnership with Bajaj Auto, the Indian motorbike giant. Volkswagen, perhaps the original "people's car producer, and Toyota, the world's largest carmaker, have also expressed interest in developing ultra low-cost models.

Separately, Tata said that it was happy with the progress it was making in talks to buy Land Rover and Jaguar from Ford, a deal likely to be worth about $2 billion (£1 billion). The increasingly acquisitive group vehemently denied reports that it had discussed sharing technology from Land Rover and Jaguar with Fiat, with which it already has a joint venture to make cars and engines in India and an alliance for trucks in Latin America and Europe.

The issue of how much technology support Ford will commit to Tata is thought to be one of the major potential hurdles in the ongoing negotiations.

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