The government today unveiled a long awaited package of support for the car industry worth £2bn amid warnings of a "catastrophe" for the sector with the loss of tens of thousands of jobs.

Business secretary Lord Mandelson said the government would provide loan guarantees to car manufacturers and large suppliers to try to reverse a huge slump in car buying.

Jobs have already been axed in the industry and a number of plants are on extended shutdowns because of the drop in sales.

Mandelson said today's measures offered a "significant boost" to the industry but he denied the government was offering a "bail-out" or a "blank cheque".

Car sales have plunged in recent months, as the deepening recession slashes demand for new vehicles. Many manufacturers have already cut production, putting their employees on three or four-day weeks or sending them on enforced leave. The 450 jobs cuts announced by Jaguar Land Rover earlier this month have added to the pressure on the prime minister to take action.

Gordon Brown's spokesman said this morning that the package was meant to help the car industry through the economic crisis.

"Lord Mandelson and the department have been making clear that, in our view, the car industry is a sector with a strong future," he said. "So not only are we in a position to provide some support to help them get through this difficult period but also, and this will be a very important part of the announcement, this is about how we provide the right support for them in the future."

Environmental groups have said they would oppose the use of taxpayers' money to stimulate demand for private cars, arguing that greener initiatives such as public transport improvements should be supported instead.

Data released by the CBI showed that motor traders have seen sales fall for the past eight months.

The car industry has benefited from the ready supply of credit in recent years, which allowed it to offer attractive finance packages to potential customers. The credit crunch has put the squeeze on this practice. Figures released by moneyexpert.com showed that 300,000 motorists have been turned down for a car loan in the past six months.

Several other countries are also considering intervening to help their domestic carmakers. Last week the French government said it would offer up to €6bn (£5.5bn), to avoid flagship names such as Renault going under. In America, car part makers are now warning that they face bankruptcy, despite General Motors and Chrysler receiving billions of dollars in aid.