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Cars with a qualified driver who can take over control of a driverless car and fully autonomous vehicles where there is no driver, are set to be tested in the UK.
Guided by a system of sensors and cameras, the cars will, for the first time, be driven on public roads in a series of trials that will last between 18 and 36 months, starting in January 2015.
UK cities can now bid for a share of a £10million competition to host the trials, with up to three cities being selected.
But motoring groups have warned that road users will be wary of the introduction of driverless vehicles.
The go-ahead for the new cars was given by Business Secretary Vince Cable with Science Minister Greg Clark, who tested a driverless car at the headquarters of motor industry research organisation MIRA at Nuneaton in the West Midlands.
Mr Cable said: “The excellence of our scientists and engineers has established the UK as pioneers in the development of driverless vehicles through pilot projects.
Today's announcement will see driverless cars take to our streets in less than six months, putting us at the forefront of this transformational technology and opening up new opportunities for our economy and society.
“Through the Government's industrial strategy we are backing the automotive sector as it goes from strength to strength. We are providing the right environment to give businesses the confidence to invest and create high skilled jobs.''
Transport Minister Claire Perry said: "Driverless cars have huge potential to transform the UK's transport network. They could improve safety, reduce congestion and lower emissions, particularly CO2.
Mr Clark said: “Britain is brilliantly placed to lead the world in driverless technology''
Driverless cars are already in use in America, Japan and Sweden.
But AA president Edmund King said that a recent AA/Populus survey of more than 23,000 AA members showed that 43% did not agree that UK legislation should be amended to even allow trials of the technology.
And the RAC said: “We suspect it will be difficult for people to come to terms with giving up control of their vehicle to a computer.''