The high-profile launch of the world's cheapest car - the £1,250 Tata Nano - was in jeopardy last night after tens of thousands of protesters gathered at the factory being built to produce the vehicle, complaining that the land had been taken illegally from small farmers.

Demonstrators blocked roads leading to the plant at Singur, about 20 miles from Calcutta in the northern Indian state of West Bengal. About 4,000 riot police were drafted in to protect the factory, which is due to start producing the Nano this autumn. Security was tight and water cannons were on standby amid fears that the protests could turn violent.

Activists at Singur said that they would call off their protest only if the state government handed back about 400 acres to farmers - a move that could derail the Nano project.

Tensions in the area earmarked for the Nano factory have been simmering for two years amid allegations that the communist-led state government of West Bengal had seized land illegally from local small farmers.

Mamata Banerjee, the head of the main opposition Trinamool Congress party in West Bengal, called for an indefinite siege of the factory. Farmers have not accepted any compensation. Kajal Das, the wife of a farmer who lost land to the project, said: “We have gathered today to get back our land. Money cannot compensate our loss.”

The demonstrations threaten to ruin the commercial debut of the Nano, one of the most closely watched launches in the car industry in decades. At its unveiling in January, the Nano was lauded as marking a revolution in the industry, allowing millions in India's emerging middle classes to buy a car for the first time.

On Friday, Ratan Tata, the Tata chief executive, said that he was ready to abandon the Singur plant if the long-running series of demonstrations did not abate. Such a decision would involve the company writing off up to $350 million (£189 million) in investment.

Already there are fears that the car's ultra-low-cost business model could be scrambled by sharp increases in raw materials and that Tata will make heavy losses on the first batch 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. Any delay to production capacity coming online, therefore, could prove hugely expensive for the conglomerate.

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

The economics underpinning the Nano make it especially vulnerable to price movements in the commodity markets. Since Tata began to develop the Nano in 2003, raw material costs have increased from about 13 per cent to about 23 per cent of its price before taxes, according to an estimate by Global Insight, the consultants.

By contrast, raw materials account for about 7 per cent of the cost of an average American car - or about $1,600, up from about $800 five years ago.

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