Around 40 employees who have barricaded themselves inside say they will ignite the five-metre long gas tank at the entrance to the Sodimatex car parts plant near Paris if their demands are not met.
They have placed Molotov cocktails around the 5,000 litre canister, with one staff member warning: "It this goes up, it won't just knock down the factory. If they want us to go that far, so be it."
The men want a 21,000-euro (£19,000) extra redundancy check, instead of the 15,000 euros (£13,000) offered by the company.
Management told the 92 staff a year ago that the factory in Crépy-en-Valois, which makes car carpets and upholstery, was to close and talks aimed at reaching an agreement over pay-offs have foundered.
The workers have occupied the factory since Thursday, after a demonstration against their redundancy terms turned violent and police fired tear gas.
"I'm scared for them and I'm scared for our town," said Arnaud Foubert, the mayor from President Nicolas Sarkozy's UMP party. "I hope there will be no desperate act committed."
Gérard Declair from the Force Ouvrière union said: "Even if we tell them not to light the tank, some are uncontrollable." Christian Estrosi, the industry minister said he condemned "the unacceptable attitude of a minority".
Talks began yesterday (Friday) afternoon between staff and management of the Treves Group, the owners.
"We want real measures, we want to be able to change professions and find another job. If we come out without that, then they'll be a catastrophe," said Eric Lemoine, a CFDT unionist. "It's dumb, but that's the way it is." The stand-off comes a year after workers threatened to blow up the New Fabris car parts plant in Chatellerault, central France, in a similar row.
Eventually, employees accepted a pay-off deal.
France has been hit in the past two years by radical worker action in the wake of the financial crisis, with a string of "bossnappings" over pay and job security.
Workers at French factories have been taking increasingly radical action over the past two years in response to credit crunch lay-offs. President Sarkozy blasted the action and promised to prosecute anyone committing such "illegal" acts.