Commercial trials of the cheap, clean-fuel technology, which separates hydrogen from water, could begin in a year's time. Some larger vehicles such as buses are already powered by hydrogen, but it is expensive and dangerous to distribute large amounts of hydrogen as fuel.

The "Electro Hydrogen Generator" is being developed by OM Energy and, once fitted inside a car, would extract the hydrogen from water and mix it with petrol. Should the new technology, the first of its kind, prove successful, vehicles would use water as the main fuel supply and need only a small amount of petrol.

The generator works by spinning the water very quickly, creating an electro-magnetic field which splits the hydrogen from the oxygen. Current methods of separating hydrogen, using fossil fuels or electrolysis, release harmful emissions into the environment. The technology also has other applications, such as powering ships.

Dr Fulcieri Maltini, an independent consultant who has reviewed the technology, said: "It's a completely novel way to produce hydrogen."

Car manufacturers are trying to develop new technologies, such as fuel cells or "hybrid" cars with batteries, which are more efficient and environmentally friendly than petrol or diesel. But manufacturers are divided over which works best.

OM Energy is a Russian venture but UK Trade & Investment (UKTI), an arm of the Government, has persuaded it to domicile in the UK by attracting funding from international institutional investors and individuals. UKTI runs the Global Entrepreneurs Programme to attract overseas investment to the UK.

OM Energy has already applied for a patent for the technology. If it succeeds, the Government will take a proportion of any sales.