Two of the world's leading car companies are at odds over the supply of engines for Land Rover's best selling Freelander model, a dispute which has already cost 250 jobs.

BMW, which sold Land Rover to Ford for £1.8bn last year, has told the company that it cannot sell extra diesel engines to meet increased demand for the Freelander.

When it sold the Solihull-based company, BMW agreed to supply 32,000 diesel engines a year for the Freelander.

Land Rover said yesterday that the contract had been based on BMW's forecasts for sales of diesel-powered Freelanders. But Freelander sales have soared under Ford's ownership, to the point where it is now the best selling 4x4 vehicle in Europe.

BMW turned down Land Rover's request for "a substantial increase" in diesel engines for the Freelander, claiming that the Steyr plant in Austria, which makes them, was operating at full capacity. Paradoxically the Steyr plant has just started making diesel engines for BMW's first 4x4.

A BMW spokesman said that capacity at the Steyr plant had been stretched.

The plant was originally built to produce 300,000 petrol and diesel engines a year in the 1980s, and last year made 600,000 engines.

He said the group's plan was to move some of Steyr's petrol engine production to the group's newly opened Hams Hall engine plant near Birmingham, and step up diesel production at Steyr. But this would take time.

The switch will not be in time to provide Land Rover with extra TD4 engines for the Freelander. As a result, Land Rover has been forced to cut annual Freelander production from 84,000 to 74,000, resulting in the loss of up to 250 jobs.

A spokeswomen said that production of Freelanders with diesel engines would be capped at 32,000 a year "for the foreseeable future".

In January alone, Land Rover saw demand for diesel-powered Freelanders rise 92%. It is unable to get the TD4 diesel engine from any other manufacturer.

The spokeswoman said BMW's inability to supply further TD4s was "a bitter blow", but added that it would not prevent the company from returning to profit next year as forecast.

"Clearly this is not a desirable state of affairs," she said. "We are continuing discussions with our suppliers.

"Unfortunately it is not possible to re-engineer the vehicle to take another manufacturer's engine."

Ford is investing more than £300m to turn its Dagenham plant into a global centre for diesel engine production. But it cannot supply engines for the Freelander at the moment.

Land Rover is hoping to achieve the necessary job cuts through voluntary redundancies. The spokeswomen said that a special redundancy package had been discussed with the unions.

BMW claimed that it, too, was being hit by the capacity problems at Steyr. The plant also makes petrol and diesel engines for the group's 3 Series and 5 Series models.

"We would like to sell more diesel cars to the public in this country," the group's UK spokesman said. "We are in a similar position [to Land Rover] in not being able to meet demand."