The prospect of a new car factory in Coventry is still a possibility after the Project Kimber consortium won the maximum backing from Advantage West Midlands.

The regional development agency has agreed to support Kimber's plans, which could generate up to 200 jobs, with a conditional offer for the maximum £1.95 million in grant aid allowed under European regulations.

The backing could be a fillip for the Coventry car industry which is reeling from Peugeot's decision to close its Ryton plant next year.

Kimber, one of the failed bidders for MG Rover last year, wants to resume production of the Smart Roadster and Coupe early next year.

It has identified the former Dunlop factory in the Radford area of Coventry as a possible site for the factory, with production levels of around 7,000 in the first year.

Production is expected to increase to 11,000 in 2008 and 15,000 by 2009 of the cars, the rights to which Kimber has bought from DaimlerChrysler.

The vehicles will also have a new engine as well as be extensively remodelled at the front and back by former Jaguar designer Keith Helfet, a member of the Kimber consortium. But the site faces competition from a greenfield sites in south Wales, Thueringhen in eastern Germany and a new contender in Saxony, Germany.

A source close to Kimber said: "The group has been approached by another bidder last month, led by Dr Karl Hahn, the former chairman of Volkswagen.

"Saxony has lots of carmakers already there - VW, Porsche, and BMW as well as lots of component makers and a greenfield site.

"But the Coventry site still has attractions. It is a brown-field site, but can be easily fitted out to what Kimber needs."

The source dismissed using Ryton as a factory, saying it was too big, while the group was expecting a decision from the Department of Trade and Industry on what support it can give towards the estimated £60 million cost of setting up a factory.

He added that a decision was due shortly on which location would host the factory, which would produce cars under a "heritage British car brand".

Kimber had wanted to use the MG name, but was rebuffed by Nanjing Automobile which won the auction to buy the assets of the Long-bridge firm last year. It has since been in negotiations to use the AC Cobra name, as well as others, while it is also considering producing a third derivative of the car.

The source said: "We will make a recommendation to our backers who will make a decision. They will carry out 30 days of due diligence before we start work. We hope to start work on the factory by the end of June, with the production line working from spring next year."

The source said the factory would initially employ up to 200 people, while another 150 jobs could be created in the supply chain.

"We have had contact from several former Smart suppliers in Germany and eastern France who are contemplating moving to where Kimber restarts production.

"The Kimber recommendation will be based on 15 to 20 different attributes ranging from what kind of assistance we can receive, to the relevance of the location to the brand. Britishness is going to be very important to the brand, so Coventry is definitely still in the running."