Tata and local farmers are at loggerheads over land rights
Work at the Indian factory where the Nano, billed as the world's cheapest car, is to be made has been suspended indefinitely amid local opposition.
Tata Motors has decided to look for alternative manufacturing sites after violent protests by farmers in West Bengal, where the plant is located.
Farmers want the return of 400 acres of land and their protests have prevented any work at the plant since Friday.
Tata said the situation at the plant was "hostile and intimidating".
Farmers' groups said they were not seeking Tata's withdrawal from the area, some 50km north of Calcutta.
But they said the land on which the plant in Singur is being built had been forcibly acquired from "unwilling" farmers.
Tata said it was evaluating options to shift production of the Nano - which will cost about 100,000 rupees ($2,500) - to some of its six other manufacturing sites in India.
The firm said it would consider persevering with the Singur plant - in which it has invested $350m - if conditions around the facility returned to normal but warned that it had a "deadline" to meet to build the car.
"There is no way this plant could operate efficiently unless the environment became congenial and supportive of the project," a company spokesman said.
The BBC's Subir Bhaumik in Calcutta said other Indian states such as Maharashtra were keen to encourage Tata to build the car there.
The Nano project was a major boost for the West Bengal economy, with local authorities hoping to develop the area into a regional hub for low-cost car production.
More than 760 workers are currently employed there and Tata may consider moving them to other sites.
The Communist-led coalition in the state described Tata's decision as a "major loss" and described the current protests as "irresponsible".
One of the leaders of the protest movement said farmers' rights to their land had to be respected.
The Nano is intended to offer the dream of owning a car to the masses
"It is Tata's decision, not ours," he said of the move to stop work.
"We never asked them to leave."
India's rapid industrialization in recent years has been the backbone of the country's strong economic growth.
But this process has provoked a backlash since the majority of Indians still earn their living off the land.
The policy of creating special economic zones to attract new investment has provided a focal point for the anger of poorer, rural families who rely on their land for food and income.