The British steel industry has suffered a blow after confirmation that 2,500 jobs will go at the Port Talbot steelworks despite a £500m taxpayer-backed deal for the south Wales plant.

The business secretary, Jonathan Reynolds, has agreed a deal in which the government will provide £500m towards the construction of a new greener electric arc furnace at the site, with the plant’s Indian owners, Tata Steel, paying £750m.

However, while the deal secures the long-term future of steel production at the south Wales site, the government was unable to secure guarantees that would save the 2,500 jobs at Port Talbot that Tata was likely to cut over the coming months.

Announcing the package in parliament on Wednesday, Reynolds acknowledged that it “fell short” of his ideal outcome but laid the blame at the previous government’s door, accusing the Conservatives of a “dereliction of duty” in negotiations and letting down the people of Port Talbot.

Under the new deal, those at threat of losing their job will now receive improved redundancy packages, while there has also been an increase in how much axed employees could receive if they take part in a Tata-run training programme.

The company has also made commitments to evaluate future investments in steel plants and infrastructure, alongside Labour’s £2.5bn support package for the sector.

The first of Port Talbot’s two blast furnaces shut in July. When the second closes at the end of this month it will end primary steel production at the south Wales site, with unions and politicians warning of the threat to the UK’s economy and security from a lack of ability to produce steel from scratch domestically.

The electric arc furnace is greener but far less labour intensive, with about 500 jobs being created during its construction. It is expected to be operational in late 2027.

The failure to secure a breakthrough on jobs came as a blow to Labour after it had criticised the previous Tory government for striking an agreement to give Tata £500m for the Port Talbot site, without securing any job guarantees.

Reynolds had previously said he believed there was a “better deal available” and that Labour would ensure that job guarantees in return for investment were part of the negotiations.

The Guardian understands Reynold had initially hoped to persuade Tata to keep the second blast furnace switched on and secure more jobs but this was rejected by the company.

The last blast furnace will now close on 28 September, with most employees leaving before Christmas after working their notice periods. Tata predicts that almost all of the Port Talbot staff will be gone by March next year.

Tata had previously said it would be looking to cut 300 further jobs in three years’ time, expected to include roles at its Llanwern steelworks near Newport.

At Port Talbot more than 2,000 workers have already expressed an interest in taking voluntary redundancy. Those granted it will now be offered 2.8 weeks of salary for every year of service up to 25 years, with a minimum payment of £15,000. The previous offer was 2.1 weeks of salary for every year.

Employees will also have the opportunity to sign up to a year-long training programme, which will result in them receiving full pay for the first month and the equivalent of a £27,000 salary for the remaining 11 months.

The deal includes a commitment from Tata to work with the government to look at further investment opportunities in steelmaking facilities. The Guardian understands Tata has already committed to future investments at Port Talbot and Llanwern.

The government has promised to publish a new steel sector strategy in spring 2025 that will look into technologies for the production of primary steel.

The jobs of 2,500 workers at British Steel’s site at Scunthorpe, Lincolnshire, are under threat, with fears that the plant’s Chinese owner, Jingye, could bring forward the closure of its blast furnaces before the end of the year.

The government and Jingye are currently in talks to keep a furnace open, with an announcement expected in the coming weeks, with state support expected to also be about £500m. If the closures go ahead, Britain will become the only major economy in the G20 with no ability to make steel from scratch in a blast furnace and will be reliant on imports to meet the needs of the aerospace, rail and automotive sectors.

Unions had proposed a joint plan last year to protect 2,300 jobs at Port Talbot by keeping open the last blast furnace for a decade.

A joint statement from the Community and GMB unions said: “This deal is not something to celebrate, but – with the improvements the unions and the government have negotiated – it is better than the devastating plan announced by Tata and the Tories back in September 2023.”

Commenting on the deal, the shadow business and trade secretary, Greg Smith, said: “Is this really the new Labour playbook, scrap jobs, scrap production, and become reliant on higher polluting countries for imports? That is not what I call decarbonisation.”