Only 10 years ago, India's Tata Motors unveiled its first car, a hatchback, that established the then-truck maker's credentials as a car maker.

Tomorrow in New Delhi, the £4 billion company will unveil its boldest initiative yet - a car that will sell for less than £1,300, or less than half the current cheapest car on the market.

Dubbed the "People's Car", it will determine Tata's place in the global automotive arena, where the battle is increasingly being fought in emerging economies such as India, China and Russia.

The new model, using re-engineered plastics and modern adhesives, is a far cry from the premium Jaguar and Land Rover brands that Tata is negotiating to acquire from Ford.

The company is currently frontrunner to take over the two luxury brands, which Ford is selling as part of its global restructuring programme, but two other bidders, Indian competitor Mahindra & Mahindra and a private equity group One Equity are still in the wings.

A decision on the sale is expected to be announced in the next few weeks.

Meanwhile, Tata Motors' drive to produce a cheap, no-nonsense, small car was born out of close observation of a local market where millions often ferry families of four, plus baggage, on motorbikes and scooters.

Critics initially derided Tata's 100,000 rupee, or one lakh, price target, more so as oil and steel prices rocketed. But global car makers have taken note and are scurrying for their own versions to meet growing environmental and cost concerns.

"The product has rightfully gained a lot of international attention," said Mohit Arora, managing director for India at research firm J D Power Asia-Pacific, who will fly in from Singapore to see the car being unveiled by chairman Ratan Tata.

"It's a big, big deal for Tata Motors, and will be recorded in history books, whether or not it does well."

Tata's previous venture with a UK carmaker was not successful. The Tata/MG Rover City Rover small car was derided by critics and sold in only small numbers.

Volkswagen, Toyota, Honda, and Fiat have since said they are looking to build low-cost cars. And the Nissan/Renault alliance, which has done well with its no-frills Dacia Logan saloon built in Romania, is developing a £1,500 car with Bajaj Auto, a local Tata rival.

Ironically, Ford itself said yesterday that it plans to spend $500 million (£252 million) on expanding its India operations.

The Detroit group, which has been forced to shed thousands of jobs and shut plants in efforts to turn round its heavily loss-making North American operations, is to develop its manufacturing plant at Chennai and to bring out a new small car.

The People's Car hits the market at a time when oil prices are near $100 a barrel, when a move to fuel-efficient "green" cars is gaining momentum, and when drivers wallow in nostalgia with the revival of the Fiat 500 Cinquecento and Mini.

In Italy, the cheap and efficient Fiat 500 replaced the scooter for millions, and its 2007 relaunch won a warm response.

In India, the mini Maruti 800, made by a venture of the government and Japan's Suzuki , played a similar role in the 1980s, offering a modern alternative to the limited options available.

Today, helped by rising middle-class incomes, small cars, led by models such as Maruti's Alto and the Hyundai Santro, make up more than two-thirds of a domestic car market that should nearly double to two million units a year by 2010.

"Small cars have always been popular in India, even when oil prices were low," said Ashvin Chotai, Asian auto analyst based in London. "Globally, higher oil prices are accelerating a shift towards compact and small cars, and regulatory developments such as CO2 standards in Europe, and congestion and parking constraints are reinforcing it."

It was not a short-lived fad, he added.

But environmentalists worry that a car so cheap could be more damaging, adding more pollution and increasing India's dependence on oil imports.

Anumita Roychoudhury, at the Centre for Science and Environment in New Delhi, has said the shift to greater car ownership could be a "timebomb ticking away".

"When you lower the price that drastically, how will you be able to meet safety and emissions standards?" she said.

Tata, which has said the four-seater People's Car will have a 600cc engine, has opted for an initial production run of 250,000 units. It expects eventual annual demand of one million cars, which may be assembled by dealers or satellite units.

Tata Motors may also export the car, which would probably sell well in Africa and South and Central America, Mr Chotai said.

With car ownership in India at just eight per 1,000 people, there is huge potential to upgrade two-wheeler owners.

Already, South Korea's Hyundai, which will have the capacity to make 600,000 cars annually, has made India a small car production hub, and Suzuki is increasing its capacity to one million units a year.