Scottish & Newcastle is planning to close the Fountain Brewery in its heartland of Edinburgh as part of a drive to save £25m through rationalisation. The move comes amid growing contraction in the brewing sector, which is suffering from a decline in the on-trade.

Scottish & Newcastle (S&N), the UK's largest brewer, is responsible for some of the country's leading beer brands including John Smiths, Fosters, Kronenbourg 1664, Becks, Newcastle Brown Ale, as well as the Strongbow and Woodpecker cider brands.

In a drive launched by S&N's chief executive Tony Froggart, the company is to save £25m by streamlining its operations. As part of this strategy the company's historic Fountain Brewery in Edinburgh will be closed.

The Fountain Brewery was opened in 1856 by William McEwan and currently employs 200 people. Its closure is certain to cause a furore in Scotland, where the company has its historic roots, and this will be the first time that S&N has not brewed any beer in Scotland.

S&N's other oldest brewery is the Tyne Brewery in Newcastle, which produces Newcastle Brown Ale and currently has around 160 employees. The company is understood to have considered closing down the Tyne Brewery, and planned to outsource production of Newcastle Brown Ale to other local brewers. However, it has decided to avoid taking this measure since it would have left the company with only three brewing facilities in the UK: the Tadcaster Brewery in North Yorkshire, which produces most of the company's ale including John Smith's, and the Manchester and Reading breweries, which produce Foster's lager.

The Transport and General Workers Union strongly opposes the company's plans, as these would have a strong impact on local employment. A TGWU spokesman said: "It would be entirely wrong for the management of Scottish Courage [the UK branch of Scottish & Newcastle] to give in to pressures from the City".

Last October, Scottish & Newcastle divested itself of its pubs division to concentrate on brewing operations. This follows a trend for a separation of the two activities in the UK as the on-trade is shrinking in comparison to the off-trade, and increasing numbers of consumers find the comforts of home more attractive.