The Swedish government won approval from the European Commission on Friday to guarantee loans from the European Investment Bank for Ford Motor Co unit Volvo to help co-finance the development of green cars.
Automakers across Europe have called for government subsidies to help them develop less-polluting vehicles and some states are offering buyers incentives to select such models.
Volvo plans to use the loans of 500 million euros ($710 million) for a 1.9 billion euro project to develop emission reductions and energy efficiency in cars, the Commission, the executive arm of the European Union, said in a statement.
The state guarantees would contribute to Volvo's investment project for environmentally friendly cars without giving rise to any undue distortions of competition, EU Competition Commissioner Neelie Kroes said.
In March, the EIB granted Volvo a loan of 200 million euros to develop new environmentally friendly vehicles, provided the carmaker could secure loan guarantees.
But talks between Volvo and the Swedish government over such a guarantee were put on hold last month and the carmaker has since had talks with the Belgian region of Flanders, home to Volvo's biggest plant, about providing guarantees.
Swedish Enterprise Minister Maud Olofsson said Ford had informed the government that the company was prepared to restart talks once the question of a new owner for Volvo, whose U.S. parent has said it wants to sell the unit, had been sorted out.
Today's decision from the Commission raises the prospects for Ford and Volvo ... to get access to the loans from the European Investment Bank, Olofsson said in a statement.
The loans and guarantees approved by the EU would be provided in five tranches from 2009 to 2010 with a maturity of seven years.
Volvo would pay a premium for the guarantees and provide the Swedish government with collateral covering the full guaranteed amount, the Commission said.
(Reporting by Bate Felix, additional reporting by Niklas Pollard in Stockholm, editing by Dale Hudson and Jason Neely)