Ineos operates the crude oil refinery at Grangemouth

Chemicals company Ineos Enterprises said the facility at Grangemouth, due to open in 2008, would aim to produce half a million tonnes of fuel a year.

Biodiesel, made from vegetable oil and diesel, is seen as a way of reducing greenhouse gas emissions.

Ineos has also announced plans to increase its biodiesel output across Europe to at least 2m tonnes by 2012.

The Grangemouth facility will go ahead after the company was allocated up to �9m of public funding through the Scottish Executive's regional selective assistance programme.

'Limited impact'

Environmental group Friends of the Earth Scotland welcomed the move, but claimed bio-fuels only had a limited role to play in tackling climate change, saying better transport policy was the key weapon.

But Secretary of State for Scotland Douglas Alexander said the Government was committed to supporting the development of renewable, low carbon transport fuels.

"Five per cent of all fuel sold on UK forecourts will be required to come from a renewable source by 2010 and an investment of this size can only be a positive contribution," he added.

Ineos Enterprises chief executive Harry Deans said: "The UK is fully committed to the increased use of biofuels as part of its energy mix and we believe that this investment will make an important contribution towards this."

As well as the Grangemouth operation, the company said it was planning further investments at its sites in Belgium, France and Germany in its bid to become Europe's main biodiesel player.