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Motorists will receive £2,000 if they sell their old car and buy a new model, after the chancellor bowed to pressure from the automotive sector and announced a car scrappage scheme this

afternoon. Car and van owners whose vehicle was bought more than 10 years ago will be given £2,000 towards a brand new vehicle. The scheme will expire in March next year and follows similar

moves by major European countries, including France and Germany. But the car industry will have to contribute £1,000 to the grant and it will not be restricted to greener vehicles. The

"cash for clunkers" programme will also be markedly smaller than Germany's, which is investing €5bn (£4.49bn) and has boosted sales by 40%. By contrast, the UK version will

cost £600m (£300m from the government) and will end earlier than expected if the money runs out before March. The beleaguered car industry welcomed the scheme, which has been trumpeted

within the cabinet by Lord Mandelson, the business secretary. "The introduction of a vehicle scrappage scheme will boost the new car market, encourage consumers to get back into car

showrooms, and reduce the likelihood of employee downsizing in this sector," said Paul Williams, chairman of the Retail Motor Industry Federation. Paul Everitt, chief executive of trade

body the Society of Motor Manufacturers and Traders (SMMT), said: "This is very good news for car and light-vehicle buyers. It will kick-start demand in the market place." However

the AA warned that a shock increase in fuel duty, also announced today, would more than cover the scheme's costs and was effectively "giving with one hand and taking with the

other". Industry observers said the programme would boost sales of smaller cars such as the Ford Fiesta and the Toyota Yaris, which are not normally discounted. Vauxhall has been

offering a £1,000 scrappage scheme for customers who trade in their old car for 18 months. About 12,000 people have taken advantage of the offer. General Motors UK, its parent firm, welcomed

the budget scheme, which would boost the discount the company could offer on new Astras and other models. It added that the offer would get more people through showroom doors. Larger and

more expensive cars already tend to carry discounts of around £1,000 – meaning that half of today's £2,000 grant will already be priced in for many vehicles. Jaguar Land Rover said:

"The initiative by several European governments to introduce scrappage schemes has clearly had a positive initial effect on demand, but generally this has been limited to smaller car

sectors. Accordingly we expect very limited direct benefit of the UK scheme for those manufacturers such as Jaguar Land Rover engaged in the premium sector." The scheme will run from

mid-May and car owners must prove to dealers that they own the vehicle, to prevent abuse of the scheme, and that it was registered on or before July 1999. Mindful of criticism that the

scheme would benefit non-UK manufacturers because eight out of 10 cars bought in Britain are imported, the government said many of the cars acquired under the programme would have UK-made

parts. As well as taking care of the paperwork, car dealers will be expected to take care of the scrappage process. Edmund King, president of the AA, said: "Any incentive will be

delivering a short-term boost for the industry. It will bring confidence back into the market." The RAC Foundation warned that the programme would result in the loss of large numbers of

efficient, relatively clean cars. But it said the introduction of brand-new vehicles would improve road safety. Professor Stephen Glaister, director of the RAC Foundation, criticised the

failure to include incentives for low-carbon vehicles. "If it does not encourage people to buy green vehicles it is a missed opportunity as far as the environment is concerned," he

said. Lord Mandelson said the scheme would boost "the whole motor trade," which has been hit by a swathe of redundancies, factory closures and pay cuts over the past six months.

He added: "The car sector is under huge pressure at the moment and the government is determined it remains a very important part of our manufacturing base. It invests heavily in

research and development, supports highly skilled workers and a wider supply chain. These are vital to our future manufacturing and retail success." The SMMT is still trying to secure

government help to make it easier for consumers to get car loans. Next week it will meet the Shareholder Executive, the government body overseeing state-owned assets, to talk about the

issue.