The Church of England will come under more pressure to give up its stake in a controversial mining group after it emerged that the firm supplies materials to India's nuclear missile programme.

Bauxite mined by Vedanta Resources from a sacred Indian mountain will be used to produce components for the country's military, the Guardian has learned, bringing a potential conflict between the church's ethical investment policy and £2.5m stake in the company. Several local councils also have stakes in the firm.

A spokesman for Vedanta confirmed that bauxite from the mine would be supplied to its Balco subsidiary but insisted that the company was only involved in the production of metals for the weapons, rather than the weapons themselves.

"What these guys sell is the refined aluminium which can then be used for all sorts of things, they are not actually involved in manufacturing weapons," he said. Balco supplies 90% of the aluminium used in India's nuclear-capable Agni, Prithvi and Akaash missiles.

Vedanta's plan to mine at Niyamgiri in the eastern state of Orissa has prompted a barrage of criticism from environmental activists, who claim it will displace the 8,000 strong Dongria Kondh tribe and wreck the delicate ecosystem of the area. The hill is regarded as sacred by the tribe.

Last week activists including Bianca Jagger targeted the British company's annual meeting, hoping to persuade shareholders to force the company to abandon plans for the mine.

Those shareholders include the Church of England, which has a £2.5m holding in Vedanta. It has already promised that its Ethical Investment Advisory Group [EIAG] will hold talks with the company's management over the mining plans.

But today's revelation will heap further pressure on the church, which has a policy of not investing in companies that supply or manufacture armaments.

In a policy document entitled Church Investments and Armaments, the EIAG states that "the church has historically avoided armaments where these constituted the main business or focus of any company. However a policy review resulted in new criteria being adopted that provides for the complete exclusion of armaments."

A spokesman for the EIAG said: "We are taking the allegations about Vedanta's Niyamgiri operations and plans very seriously and we will make our assessment as quickly as possible."

He said the company had responded promptly to a request for a meeting but because of the holiday season a video conference was not likely to take place before September. The EIAG is also planning to take up an offer from Vedanta to visit Lanjigarh in Orissa, where the firm has a bauxite refinery, to look at its operations.

Campaigners opposed to the mine said the company's involvement in the production of nuclear missiles was further reason to oppose the project.

Meredith Alexander, head of trade and corporates at ActionAid said: "Vedanta's commitment to sustainable development becomes ever more laughable. The news that Vedanta provides raw materials for weapons systems is outrageous.

"This is just another reason why investors should take a hard look at their holdings in Vedanta. The Church of England, for example, state that they will not invest in defence companies. Vedanta's involvement in missile production surely makes their investment even more controversial."

Campaigners also want other high profile investors to rethink their involvement. These include the pension funds of three councils – Hertfordshire and Suffolk county councils and Havering district council. The list also includes leading fund managers such as Norwich Union Life and Pensions Ltd, Halifax pension fund and Axa Sun Life Assurance Society.

The aluminium alloys needed for India's Agni, Prithvi and Akaash missiles were developed by Balco, purchased from the Indian government in 2001 by Sterlite Industries – which is owned by Vedanta Resources. Vedanta has an alumina refinery at Lanjigarh, where from next year bauxite mined at Niyamgiri will be processed, according to its most recent company report.

Once that happens, the company plans to continue to supply part of Lanjigarh's output to Balco, which states on its website that one of the key clients is the Indian missile programme.

Vedanta was allowed by the supreme court to go ahead with the mine at Niyamgiri despite advice from the court's central committee that the use of the forest land in an ecologically sensitive area should not be permitted. In its findings, the committee observed that "the casual approach, the lackadaisical manner and the haste with which the entire issue of forests and environmental clearance for the alumina refinery project has been dealt with smacks of undue favour/leniency".

Campaigners still believe that they have a chance of overturning the decision, with ActionAid citing a 1989 protest which stopped a Balco mine in the Gandhamardan hill in neighbouring Bargarh district. Last year the company made a renewed application to mine there too.

"Despite the supreme court ruling, the legal struggle against Vedanta's proposed mine in Niyamgiri continues," said Meredith Alexander. "The Kondh people have now launched a fresh challenge which highlights Vedanta's environmental record and its dogged refusal to listen to the local community.