You cannot chop and change on the back of short-term currency fluctuations

Honda spokesman

However, Honda will also buy less car components from suppliers in the UK, instead sourcing them from factories in the eurozone.

The news comes after warnings from car makers like Toyota, Nissan and Matsushita, that they may move production to the continent if Britain does not adopt the European single currency.

The move has been welcomed by anti-euro campaigners as "more good news for Britain's manufacturing", and a reflection of the UK's "long-term competitive advantages: economic stability, low taxation and relatively light red tape".

But Kitty Ussher of the Britain in Europe campaign said that the move was irrelevant to the controversy, and based on the favourable exchange rate between the pound and the yen.

A spokesman for Prime Minister Tony Blair said the decision was "a vote of confidence in the UK". He said Honda was in the UK "because we have the lowest inflation in Europe ... and sustainable growth".

Strong pound

Honda said on Sunday that it was not to be swayed by "short-term currency fluctuations".

"You have to take the long-term view and what is working against you today may work for you in a couple of years," a spokesman said.

A report in the Tokyo business newspaper Nihon Keizai said the pound had not appreciated against the Japanese yen as strongly as it had against the euro.

This allows the company to shift some production from Japan to Swindon where output had fallen.

Jobs at Toyota's UK suppliers are under threat

Honda was using only 70% of the plant's 150,000 annual production capacity due to the strong pound, which pushed up prices of British products sold abroad, the paper added.

Industry analysts say that unlike most global car firms Honda has only one factory in Europe, and has no alternative than to focus on its UK production base.

The Honda move contrasts with recent threats by car manufacturers to move their business from the UK because of the strength of the pound against the euro.

Toyota, the world's third-largest car maker, announced last week it wanted its UK suppliers to settle all bills using euro in order to minimise its "currency risk exposure".

The move threatens UK jobs as British suppliers could be forced to source raw materials and components from the eurozone, where they are cheaper.

Industry experts have warned that other car makers, such as Ford and General Motors (Vauxhall) could follow.

But despite the threats from firms like Nissan and Matsushita to abandon the UK, foreign direct investment is still pouring into the UK, giving support to the euro-sceptics' argument.

"Short-term currency fluctuations are simply less important than our long-term competitive advantages: economic stability, low taxation and relatively light red tape," a spokesman for anti-euro lobby group Business for Sterling said on Sunday.

Secure future

Three thousand people currently work for Honda in Swindon and the news secures their long-term future.

The company is building a second plant in the town to raise output next year. This will employ an extra thousand staff.

No new jobs are planned.

"With the opening of the new factory in the autumn of 2001 we will be exporting cars to Japan and North America for the first time," a spokesman for Honda said.

"We certainly have the flexibility to increase productivity to a much higher level. Currently we are producing 100,000 cars a year, which will be rising to 250,000 by 2002," he added.

The Swindon factory, which opened in 1992, currently makes the Civic's four-door and station wagon models and the larger Accord sedans.

Honda's European car operations, which make up 11% of the group's output, lost 14.5bn yen in the year to 31 March.