"The Indian conglomerate Tata has snubbed Lord Mandelson, the business secretary, rejecting a 10 million pound loan for a technical centre in the Midlands," the Sunday Times reported.
Quoting senior motor industry sources, the report said the Tatas, owner of premium car brands Jaguar and Land Rover and steel maker Corus, has in the past few days told the government that it does not want the money.
"It has decided it can get better terms from commercial lenders," the newspaper said citing sources.
Mandelson had last month announced the loan (10 million pound), saying that Britain was backing Tata's research into electric cars.
The money was awarded as part of the Automotive Assistance Programme, a scheme that was designed to help the car industry overcome the worst of the recession and foster investment in new technology.
The 10 million pound government loan was designed to bolster a 25 million pound investment by Tata Motors, in its European Technical Centre based at Warwick University.
The Warwick technical centre was set up in 2005 to develop technology to be used in Tata cars manufactured in India and give the group access to European automotive talent.
It is working on a European version of the Nano, the affordable so-called 'people's car', which was introduced in India last year.
The money was supposed to be used to develop an electric version of one of its existing models.
The daily further said that the Tatas had declined to comment, while Mandelson's Department for Business, Innovation and Skills said that the loan was still on offer.
Earlier, the Tatas and Mandelson were involved in negotiations over aid for Jaguar and Land Rover.
The Tatas, which bought the British brands from Ford last year for 1.3 billion pound, had asked the government for a 500 million pound loan guarantee when vehicle sales slumped. But Tatas eventually decided not to accept a government offer, saying it could find better terms elsewhere.
The newspaper further said that Jaguar Land Rover is considering whether to close one of its three UK plants as part of a plan to cut costs.