Brazil's state development bank has said it will halt a loan worth 497m reais ($US232.1m) to Volkswagen until the company concludes negotiations with local unions over layoffs, wages and a possible plant closure.

Reuters noted that the decision followed a threat by Volkswagen to shut down its oldest plant in Brazil, in Sao Bernardo do Campo, where the country's President Luiz Inacio Lula da Silva started his career as a metalworkers union leader.

Labor minister Luiz Marinho reportedly met with Lula's chief of staff Dilma Rousseff and state development bank head Demian Fioca before announcing the government's decision.

"We will see the impact of negotiations in the investment strategy," Fioca told Reuters after the meeting.