MG Rover will turn to India for its next new small car in late 2003.
The successor to the Metro 100 will be a lightly reworked MG Rover version of the Tata Indica, unveiled at last year's Geneva Motor Show to much acclaim.
That is sold as a petrol and diesel model approximately equivalent in size to the Ford Ka.
The Indica immediately set a new benchmark for models made in India. Japanese inspired levels of design, manufacturing, assembly and good build quality has encouraged MG Rover to do the deal.
In a statement, the Midlands-based car company said it was looking for a new super-mini but the strength of the pound made it uneconomic to build at home.
Tata's contract will provide an "off-the-shelf" and comparatively cheap new small car for the British company, but it will be cosmetically altered to please MG Rover buyers throughout Europe where it will sell through existing dealers.
The UK company says that its Midlands car workers have nothing to worry about in last week's announcement but that the deal will bring long term benefits.
Prof Garel Rhys, Director of the Centre for Automotive Industry Research at the Cardiff University Business School, agreed and said, "Its a very shrewd and smart move for MG Rover.The deal will give MG Rover and its dealers a modern super-mini at a very good price.
"When the former BMW owners ended production of the Metro/100 they had nothing to replace it and lost a lot of owners who went elsewhere."
He added, "The agreement with Tata will not impact on the negotiations with China Brilliance to build a successor to the 25 or the discussions to buy a former Daewoo plant in Poland for a new 25 and 45 model, which should be announced shortly as well."
But the contract has concerned UK unions, who want a meeting with MG Rover to clarify some points.
MG Rover employs around 6,500 workers at its plant in Longbridge, Birmingham and Tony Woodley, deputy general secretary of the Transport and General Workers Union, said he believed collaborative deals should benefit both parties.
"I just don't see anything in this for us," he said.
"While we welcome anything that cuts costs, there are too many unanswered questions in this case. It does not seem like a good deal and I shall be seeking urgent talks with the company."
MG Rover has entered into a number of car building contracts since being bought from BMW. It is working on ventures in China, Poland and Italy and supplies engines to smaller car makers such as Caterham.
The Indica is made in three and five doors with petrol and diesel engines of around 1.4 litre capacity.The MG Rover version will be manufactured to the company's design and engineering standards by Tata Engineering, at its Pune factory.
Kevin Howe, chief executive, MG Rover said, "This new car, which will fit perfectly in to our existing product portfolio, will reach a whole new customer base."
Ratan Tata, chairman of Tata Engineering said, "We are very pleased to be manufacturing MG Rover's new small car at our plant in Pune and see this as a great endorsement of our engineering and manufacturing expertise.
"The introduction of this car will see the achievement of yet another milestone for both companies, and marks the start of what we hope will be a long and productive relationship."
Tata is the world's biggest manufacturer of commercial vehicles but has diversified interests include steel, communications, consumer products, chemicals, hospitality and IT. The $9 billion group comprises 80 companies and has about 225,000 employees.
The suggestion of a possible link with Tata has been made for over a year. MG Rover has also entered discussions with Far East based China Brilliance to make another small car but troubles with the Pacific rim firm has slowed progress.