Jaguar Land Rover (JLR) and Saudi Arabia's National Industrial Clusters Development Programme (NICDP) will now begin a detailed feasibility study together, to determine the viability of setting up an automotive facility, the company said in a statement.
Commenting on the development, JLR Chief Executive Ralf Speth said: "The Kingdom of Saudi Arabia is an attractive potential development option, complementing our existing advanced facilities in Britain and recent manufacturing plans to expand in other countries including India and China."
He said the company is committed to further international partnerships to meet the demand for its highly sought after vehicles.
Discussions between JLR and the Saudi government are at a preliminary stage, although opportunities have already been identified in aluminium component production, the statement added.
Issues such as level of investment, potential capacity and job creation have not yet been discussed in detail between the parties, the company said.
"This is an exciting project that could enable Jaguar Land Rover to establish a joint venture partnership in a part of the world where luxury vehicle sales are expected to rise.. If we proceed, it will complement our existing expansion in the UK and elsewhere," Speth said.
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Pending agreement on development options in Saudi Arabia, JLR would expect to announce further plans in 2013.
JLR is looking to benefit from the world's largest integrated aluminium complex, a joint venture between Saudi Arabian Mining Company and Alcoa of the US, which is due to begin production in 2014 at the Ras Al Khair facility.
The company is among the pioneers in aluminium body development in premium car segment, using lightweight metals for its Jaguar XJ model and the all-new Range Rover.
Its exploratory discussions about potential investment in Saudi Arabia follows its recent joint venture announcement with Chery Automobile Company Ltd to manufacture vehicles at a new plant near Shanghai in China, and a separate expansion of the JLR assembly at the company's plant at Pune, India.
JLR had witnessed increasing sales from emerging markets, which contributed to a 32 per cent increase in global retail sales to 3,24,184 vehicles in the eleven months to November 30, 2012.
In the current calendar year, sales in the Middle East and North Africa have increased by more than 9 per cent to 11,418 units, the company said.