British oil firms are facing a legal battle over exploitation of the huge Canadian tar sand fields with indigenous people who claim the industry is ruining their traditional lands.

The Co-operative Bank will announce today that it is to fund a legal challenge by the Beaver Lake Cree Nation, which claims the boom in tar sands extraction is destroying their hunting and fishing lands.

The court challenge calls for an injunction to stop more than 16,000 permits issued by the Alberta state government and, if successful, could dramatically reduce or even stop what has been described as a modern day "gold rush" for the oil, spurred by the expectation of high long-term oil prices.

Last year the International Energy Agency estimated that the amount of oil in tar sands and other "unconventional" sources, especially in Canada and Venezuela, was 1-2tn barrels, only slightly less than the remaining conventional oil sources. Companies involved include Shell, BP, ConocoPhillips and Total.

Visiting London this week to highlight the case, the Beaver Lake Chief Al Lameman said they had taken action after evidence began to emerge that caribou, elk, moose, deer and other animals were disappearing and infected with diseases, fish stocks were damaged by pollution in the water, and plants used for traditional medicine were under threat.

A study funded by the US-based Natural Resources Defense Council estimated more than 160m migratory birds could die early over the next 30-50 years because of disturbance of migratory grounds and pollution. There have also been claims of an increase in human health problems.

"The impacts are very, very devastating sometimes," he said. "We refer to the earth as our mother, the mother of all things."

The census records 922 Beaver Lake Cree people, of which about half live on the reserve. Most of them regularly hunt, fish for winter food supplies and gather medicinal plants, said Jack Woodward, theindigenous peoples' rights lawyer who is handling the case. "People tend to think first nation [indigenous peoples] culture is dying off and gone, and it's not," he added.

The case rests on a treaty signed in 1876 under which the Beaver Lake Cree gave up their ownership of huge areas of land, in return for a guarantee that "as long as the sun shines, the rivers flow and the grass grows, we can continue our traditional way of life", including "traditional rights to hunt, fish, trap and gather for food and support". However another clause in the treaty excluded land that may "be required or taken up for settlement, mining, lumbering or other purposes."

In 2007, Woodward helped win a landmark ruling in the British Columbia Supreme Court that the provincial government had overstepped its authority in granting land-use rights to companies without the approval of the local Tsilhqot'in first nation. He said the precedent should help the case against Alberta, which was originally lodged in May 2008.

A spokesman for the Alberta state government said: "The province has not yet filed a statement of defence, although the intent is to rigorously defend ... this lawsuit." He noted the economic benefits of tar sand exploitation, saying that between 2000-2008 an estimated CAN$87bn ($67.5bn) was invested in oil sands projects in Alberta, that and every dollar invested in the oil sands creates about $6 worth of economic activity in Alberta and another $3 elsewhere.

The Co-operative Bank has offered the Beaver Lake Cree nation £50,000 initially and more funding if necessary in future. Paul Monaghan, head of social goals and sustainability for Co-operative Financial Services, said the company wanted to help fight the legal battle and publicise the problem internationally.

If the Beaver Lake case is successful, other indigenous groups could also mount legal challenges and oil companies could be hit with potentially "massive investment damages", said Monaghan. "In addition to the ecological devastation, the extraction and production of these fuels emits between three and eight times more carbon dioxide than conventional oils," he added. "If unchallenged, this trend risks making attempts to avoid dangerous levels of climate change almost impossible."

In the Beaver Lake area, future extraction might not stop altogether, but would be much more tightly controlled "to the point it is not a danger any more", said Lameman. "What we want is control over what's happening on it."

• This article was amended on Monday 2 March 2009. Alberta is a province of Canada, not a state.