Sky News can exclusively reveal that Whitehall officials and Tata Steel are close to agreeing a deal that would commit more than £1bn to the future of its Port Talbot steelworks, but which could ultimately result in thousands of job losses.

Sources said this weekend that the terms of an agreement were subject to change, but that there were hopes of finalising it as early as this month.

One insider suggested that Tata Steel had been trying to persuade the government to increase the proposed funding package in recent weeks.

Under the plans currently envisaged, the government would commit approximately £500m of public funding to the company, while Tata Steel's Indian parent would sign off £700m of capital expenditure over a multi-year period.

Port Talbot employs about 4,000 people - roughly half of Tata Steel's overall UK workforce of approximately 8,000.

Industry sources close to the discussions said the company had indicated that over the long term, as many as 3,000 of its British-based staff were likely to lose their jobs.

Electric arc furnaces, which Tata Steel would commit to building as part of the agreement with government, utilise different, less labour-intensive, processes to produce steel than traditional blast furnaces.

The government is said to have accepted during the discussions that some job losses would be inevitable as part of the transition to reducing carbon emissions, although an insider said on Saturday that a number of those could be through workers taking early retirement.

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The final scope and timing of any redundancies would be negotiated between the company and trade union officials, and sources close to the process insisted that no decisions had been taken.

If a deal can be reached, it would mark the second time this year that the government has bankrolled investment in a manufacturing business owned by Tata Group.

In July, it agreed to commit several hundred million pounds to the company to construct a £4bn battery factory in the UK for its Jaguar Land Rover subsidiary.

Rishi Sunak, the prime minister, described the investment as "a massive vote of confidence" in British industry.

Ministers and Britain's two biggest steelmakers have been in talks for months about handing over hundreds of millions of pounds of taxpayers' money to fund the companies' transition to greener production.

Initially, both Tata Steel and British Steel, its smaller rival, were offered £300m each in government support, but formal agreements have remained elusive.

British Steel's Chinese owner, Jingye Group, announced hundreds of job losses earlier this year - a move which angered ministers because they coincided with discussions about state funding - but has also yet to reach a deal to secure its plants' future.

The government originally sought to tie the issue of public funding to a moratorium on redundancies, but it was unclear whether any formal guarantees aimed at limiting job losses would be part of the Tata Steel funding package.

Sources said the offer to Tata Steel had been increased from £300m to about £500m during the course of the summer.

If completed, an agreement with the government would draw a line under years of uncertainty about the medium-term future of Port Talbot, although it was unclear whether the company would make specific commitments about the long-term as part of a deal.

As recently as May this year, Tata Steel warned of a "material uncertainty" over the future of its British business, citing a lack of clarity about potential government support among the factors raising doubts over its prospects.

In an interview with the Financial Times in July last year, Natarajan Chandrasekaran, the Tata Group chairman, said: "A transition to a greener steel plant is the intention that we have... but this is only possible with financial help from the government.

"We have been in discussions over the last two years and we should come to an agreement within 12 months.

"Without this, we will have to look at closures of sites."

In 2020, the Treasury hired bankers and management consultants to draw up a blueprint for the future of the steel industry and advise on talks with Tata Steel about the future of Port Talbot.

During the pandemic, the company floated a plan that would have entailed the government injecting £900m into it in return for an equity stake of up to 50%.

There is not thought to be any equity-linked element to the current aid proposal.

Nevertheless, the proposed scale of the taxpayer support for Tata Steel's UK operations illustrates the acute political sensitivity that continues to accompany the subject of British steelmaking.

With a general election less than 18 months away, and the Conservatives facing a battle to convince voters that it has a plan to restore the economy to sustainable long-term growth, the closure of one of the country's most important manufacturing sites would be devastating.

In a letter to Jeremy Hunt, the chancellor, in December, Grant Shapps, the then business secretary, and Michael Gove, the levelling-up secretary, argued that retaining sovereignty over steel production was critical to the UK economy.

"Every other G20 nation has maintained domestic steel production and, while we do not think that this should come at any cost, we do believe it is in HMG's interest to offer well-designed and targeted funding which unlocks private investment, achieves a good outcome for taxpayers, and enables transformed, decarbonised and viable domestic steel production to continue in the UK in the long-term," Mr Shapps and Mr Gove wrote.

"We do not want to become reliant on steel sources elsewhere in the same way that energy security has become self-evidently important.

Figures from UK Steel, the industry body, revealed earlier this year that crude steel production in 2022 had fallen to six million tonnes, its lowest level of output since the Great Depression of the 1930s.

A Tata Steel spokesman said in a statement issued to Sky News: "Tata Steel is continuing to discuss with the UK government a framework for continuity and decarbonisation of steelmaking in the UK amidst very challenging underlying business conditions, given that several of its heavy-end assets are approaching the end of life.

"Given the financially constrained position of our UK business, such significant change is only possible with government investment and support, as also seen in other steelmaking countries in Europe where governments are actively supporting companies in de-carbonisation initiatives."

The Treasury referred an enquiry from Sky News to the Department for Business and Trade, which said it did not comment on ongoing negotiations.