Demonstrators staged a protest at the Dairygold site last week

Dairygold made 115 people redundant from its cheese packing-plant at Felinfach, near Lampeter, in April.

But a BBC investigation found machinery bought with the grant was moved to a packing factory in Staffordshire.

The Irish-owned company said it was confident a solution could be reached "in the near future".

The assembly government said the grant was awarded to Dairygold in June 2002 so that it could increase its packing lines from four to six.

We want a positive outcome Countryside Minister Carwyn Jones

The project was completed in March 2004, but 18 months later the firm announced plans to close its factory.

An investigation by the BBC Radio Cymru programme Manylu found the machinery bought with the grant had been sold on to the Kerrygold company, which is part-owned by Dairygold, and was being moved on to its packing plant in Leek, Staffordshire.

Welsh Countryside Minister Carwyn Jones said the assembly government had been speaking to Dairygold's lawyers.

Closure of Dairygold was announced 18 months after completion

He added: "Work has been on-going over the past months to recover the grant funding and we are considering all options open to us, including legal action.

"We want a positive outcome for this and I want to reassure all concerned, including former workers at the plant, that while the process may take time it is still very much a priority."

A spokesman for the firm said: "Dairygold Food Products (UK) Ltd has been actively working with the Welsh Assembly Government since the unavoidable closure of its Felinfach cheese packing facility last February on all outstanding matters and is confident that a solution can be reached in the near future."

Plaid Cymru Ceredigion AM Elin Jones welcomed the assembly government's announcement, but wanted it to consider buying the factory and renting units to local companies.

Last week, about 300 people staged a protest outside the cheese-packing plant to coincide with a play about its closure.