The future of Tata's Nano – the world's cheapest car – remained in doubt today as protestors continued to besiege the partially-built factory where the £1,250 automobile is supposed to begin production in as little as four weeks.

Work at the plant, in Singur in the state of West Bengal, ground to a halt on Friday, when Tata said it was too dangerous to send its workers to the site. More than a week ago, Ratan Tata, the chief executive, gave warning that he was ready to abandon Singur if the protests continued. Such a move would involve Tata writing off as much as $350 million in investment.

Several of India's most prominent businessmen have now given warning that the ongoing shutdown risks ruining India's credibility as an emerging industrial superpower.

The tens of thousands of demonstrators that have gathered at Singur claim that 400 acres – about half the factory site – was illegally taken from smallholders by the state's communist-led government and are demanding the land back.

On Thursday night more than 3,600 Tata workers were blocked from leaving the plant by angry mobs. After receiving threats of further violence, the company told its staff to stay at home. "Our workers are not attending today," a Tata spokesman told The Times this morning.

The decision to down tools is a severe blow for the Indian conglomerate, which had wanted the Nano to reach showrooms in time for a prominent Hindu festival in October - a deadline that now appears unlikely.

The ultra-cheap car was first unveiled in January when its super-thrifty engineering was hailed as a breakthrough that would transform the global auto industry. Since then the Singur crisis and the soaring cost of raw materials have threatened to scupper the Nano's viability.

The Nano's symbolic significance was underscored last Wednesday when rival industrialist Mukesh Ambani, the billionaire behind Reliance Industries, India's largest private-sector company, gave a rare show of support for Tata. "A fear-psychosis is being created to slow-down certain projects of national importance," Mr Ambani, who has also faced hurdles in doing business in West Bengal, said.

Sunil Bharti Mittal, chairman of Bharti Airtel, India's largest private-sector mobile group, said: "The Tatas pulling out of West Bengal would be unfortunate for India ... the much-needed fresh wave of industrialisation in the country could suffer."

Several companies, including the FTSE 100 miner Vedanta, have encountered problems in establishing large industrial projects in India, where property rights are often disputed.

West Bengal's leftist leaders fought hard to host the plant, both for the jobs it would bring and for the message the Nano project was supposed to send the world: that India was open for business and capable of matching the manufacturing might of China.

Now, as the land row grinds on, Tata insiders admit the factory has become a PR disaster. Company executives are angry that India's national government has not intervened. There is, they say, a good chance that Tata will cut and run and that several other Indian states are lobbying hard to attract the project.

Critics say Tata has allowed the issue to fester. West Bengal first lured the Nano in 2006. The move immediately raised the hackles of local smallholders whose land – much of it immensely fertile -- was expropriated for the project under rules drafted by the British more than a century ago. The farmers' cause was latched on to by local opposition politicians, the key organisers of the current unrest.

About 2,250 out of 13,000 affected farmers have refused to take the compensation offered by the state government for their land.

All this comes as Tata faces the worst outlook the auto industry has seen in years: demand for new cars has slumped; high commodity prices have piled pressure on margins and the cost of credit has soared this year. Two weeks ago, the group was forced to scrap a £365 million rights issue that was to help finance the group's £1.15 billion acquisition of Land Rover and Jaguar after a plunge in its share price rendered the plan untenable. It will now resort to an asset sale to raise the cash, which is required to refinance an expensive bridge loan.

Over the weekend, the prospect of a resolution in Singur appeared distant. The protestors seemed emboldened by the decision to close the plant and vowed to step up their blockade. Becharam Manna, an activist at the site, said: "We will not allow anyone to enter."

Tata Motors yesterday said it had sold 43,576 vehicles in August, a decline of 3 per cent on the same month a year earlier.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive