Stephen Byers, Secretary of State for Trade and Industry, said that the UK would also chip in £152m of state and local council aid, which will be paid in instalments linked to productivity targets.

The huge investment will help to secure 9,500 jobs at the Birmingham plant, which was threatened with closure earlier this year.

Mr Byers said: "This is great news for Longbridge, the West Midlands and the country as a whole.

A new chapter for Rover workers

"I wanted the Longbridge agreement to be one which heralded a new approach to government assistance to industry - a new approach which reflects a long term commitment and not a quick fix.

"That is why I sought guarantees on productivity targets, raising skills and substantial investment from the company itself. Guarantees have been given in all these key areas."

If strict targets are not met, BMW will have to pay back the money.

Prof Garel Rhys (Cardiff Business School) and Longbridge trade union convenor Tom Glennon assess the future of Rover

BMW Chairman Joachim Milberg said: "We promise that Birmingham will become an outstanding plant - among the very best in the world."

The 100-year-old factory will be virtually rebuilt so that car production can be doubled.

In total, BMW plans to invest in the region of 10bn Deutschmarks (£3.4bn) in its UK operations over the next five years.

Professor Milberg told a news conference he expects Rover to break even by 2002.

But he warned: "If the pound is as high as it is now it will have a significant negative impact for the whole of the British export industry."

'A brighter future'

However workers at Rover's Birmingham factory, who have faced the prospect of losing their jobs in recent months, are looking forward to a brighter future.

Rover has already announced that a new Mini is to be built at Longbridge from the end of next year.

The deal on Wednesday secures agreement to build a new medium sized family range of cars from the end of year 2002.

Total production at the plant will double from the present capacity of 250,000 cars a year to half a million.

Altogether, it's estimated, the deal safeguards almost 60,000 jobs in the West Midlands, ranging from the Longbridge employees to workers in component suppliers and other firms dependent on Rover.

Tony Woodley, national officer of the Transport and General Workers Union, said he was delighted that the deal was being finalised.

"Whilst the difficulties for our members and Rover have not completely gone away, bearing in mind that we still have to restore customer confidence and sell many more vehicles, the fact is that Rover Cars will now survive."

Mr Byers said he was confident that the deal would now be approved by the European Union.

Reversing decline

BMW has already invested £2.5bn in Rover, but considered closing its subsidiary after losses of £640m were recorded last year.

Hopes are high for the new Rover 75

Following agreement with the unions for new working practices and 2,500 job losses, the German car giant decided to boost its investment in an attempt to turn round Rover's fortunes.

Rover has been making losses since it was bought by BMW in 1994. When the Bavarian maker of luxury cars announced its group results, the extent of Rover's problems was more than obvious.

Russel Hayes: "The agreement will transform the future of Rover"

The UK brand's new car deliveries had fallen by 38% in the first quarter of the current trading year, pulling BMW's overall sales down by 15,000 vehicles to 280,000.