The group, which had hoped to market the four-door Nano for 100,000 rupees ($A2,665) a unit by October, said it was considering shifting the plant from its site in the Singur district of Marxist-ruled West Bengal state.
"Tata Motors has been constrained to suspend the construction and commissioning work at the Nano plant in Singur in view of continued confrontation and agitation at the site," the company said in a statement.
"In view of the current situation, the company is evaluating alternate options for manufacturing the Nano car at other company facilities," it said.
The announcement came as thousands of protesters continued to blockade the nearly completed Nano car plant in Singur, a suburb of state capital Kolkata, saying poor farmers had been evicted to make way for the factory.
The protesters, led by local opposition leaders, say they will lift their siege only if 160 hectares of land is returned to the owners.
Protests in the area have been going on for two years but recently escalated. On Friday, the company said it was halting work at the project after it could not assure its employees' safety.
Tata Motors has already poured $US350 million ($A412 million) dollars into the project.
The state government acquired about 1,000 acres for the plant but the activists insist only 600 acres are needed.
The Tata group, whose business interests span locomotives to cosmetics, said it was suspending the project because of security fears.
"The decision has been taken in order to ensure the safety of its employees and contract labour who have continued to be violently obstructed from reporting to work," the Tata statement said.
It also said the business group was studying alternative sites to set up the factory.
