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Production of the Nano, billed as the world's cheapest car, has been suspended indefinitely amid reports of more disturbances at the factory.
Tata Motors has decided to look for alternative manufacturing sites after violent protests by farmers in West Bengal where the plant is located.
Farmers want the return of 400 acres of land purchased to build the plant.
Tata said the situation at the plant was "hostile and intimidating".
The West Bengal government has called for urgent talks between government and opposition leaders and Ratan Tata, and asked the group not to finalise its decision to pull out of the plant until after these meetings.
Meanwhile, Indian businessmen are worried that the disturbances will set back India's efforts to attract foreign investment.
The business community in West Bengal is particularly concerned that if Tata leaves others will follow, our reporter Rahul Tandon says.
The state government has been desperately trying to attract investors, who for years have been put off by their communist policies.
Economic blow
Farmers' groups said they were not seeking Tata's withdrawal from the area, some 50 kilometres (31 miles) north of Calcutta.
But they said the land on which the plant in Singur is being built had been forcibly acquired from "unwilling" farmers.
Tata is evaluating options to shift production of the Nano - which will cost about 100,000 rupees ($2,500) - to some of its six other manufacturing sites in India.
The firm said it had no choice but to suspend work at the Singur plant - in which it has invested $350m - because of the hostile environment.
"There is no way this plant could operate efficiently unless the environment became congenial and supportive of the project," a company spokesman said.
The BBC's Subir Bhaumik in Calcutta said other Indian states such as Maharashtra were keen to encourage Tata to build the car there.
The Nano project was a major boost for the West Bengalese economy, with local authorities hoping to develop the area into a regional hub for low-cost car production.
More than 760 workers are currently employed there and Tata may consider moving them to other sites.
The Communist-led coalition in the state described Tata's decision as a "major loss" and described the current protests as "irresponsible".
Rural anger
One of the leaders of the protest movement said farmers' rights to their land had to be respected.
"It is Tata's decision, not ours," he said of the move to stop work.
"We never asked them to leave."
India's rapid industrialization in recent years has been the backbone of the country's strong economic growth.
But this process has provoked a backlash since the majority of Indians still earn their living off the land.
The policy of creating special economic zones to attract new investment has provided a focal point for the anger of poorer, rural families who rely on their land for food and income.
(BBC)
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