Brazil is threatening to take the German carmaker Volkswagen to court over allegations that it used slave labour on a vast ranch in the Amazon, after talks on compensating workers ended without agreement.

Public prosecutors in Brazil are seeking compensation for men who they say were forced to work in “humiliating and degrading” conditions, with no clean water or sanitation, on the Fazenda Vale do Rio Cristalino cattle ranch, which was owned by the company in the northern Pará state, between 1973 and 1987.

Volkswagen denies all allegations of abuse.

The men were hired by local contractors to chop down the rainforest and clear land for the cattle ranch. When they arrived, they were forced to buy their own tools, food and housing materials, which left them in debt bondage, say prosecutors, who have shared a dossier of evidence with the company.

“Grave violations of human rights took place on a farm owned by one of the largest companies in the world and reparations should be paid on a large scale,” Rafael Garcia, the public prosecutor for the Brazilian labour ministry, told the Guardian.

Brazilian prosecutors summoned Volkswagen representatives to a meeting on 29 March – the fourth time the two sides had met to discuss compensation – but the talks ended without agreement.

Garcia said Brazil’s government would now “take all judicial and extrajudicial measures necessary to seek reparations for the damages caused by the company”, adding, “We will take all appropriate action in courts in Brazil and abroad.”

Official documents seen by the Guardian reveal that Volkswagen received grants and tax breaks worth more than $129m (£104m) to buy and run the cattle ranch from Brazil’s military government, which was in power between 1964 and 1985.

The case is based on evidence collected over a number of years by the Catholic priest and academic Ricardo Rezende, who worked for the Pastoral Land Commission in Pará. Rezende said he and local trade unionists raised the alarm about treatment of workers on the farm, but neither the police nor the government took any action at the time.

In 1984, Rezende and a delegation of local politicians visited the ranch, where he said he saw a man tied up in the back of a truck. “The foreman told me the worker had tried to escape so he had the ‘right’ to restrain him,” Rezende said.

Working with a team of academics led by Rezende at the Federal University of Rio de Janeiro, Brazilian prosecutors collected testimonies from 15 men about their experiences working on the ranch.

The government believes hundreds more people were exploited. Each year, men were hired to clear rainforest to expand the ranch. Volkswagen bought 1,390 sq km (540 sq miles) of land and by the time it sold the ranch in the mid-1980s, more than 500 sq km had been deforested, according to the prosecutor’s documents.

José Ribamar Viana Nunes said he was 16 when he met a recruiter at a party who offered him a job at the farm, in 1983. “He told us it would be a well-paid job. He said we could play football on a real football pitch,” he told prosecutors.

Nunes claimed he had been taken to the farm in the back of a truck with dozens of other men. On arrival, the truck passed through entrance gates adorned with the Volkswagen logo before driving a further 40km into the rainforest, he said.

Nunes claimed the men had had to make their own shelters out of wood from the forest and plastic sheets, which they had to buy from the contractors, as well as their food and equipment. “The prices were always exorbitant. They would write them down in a notebook,” he said.

Nunes claimed workers had to wash in and drink water from a local stream, and in some parts of the ranch they had to drink the same water as the cattle. Malaria and other illnesses were rife, he said.

Nunes alleges that he never received wages because all the money he earned was used to pay off his mounting debts, apart from a small advance payment he had received before arriving at the farm.

He also claims the men were under constant threat of violence, with contractors often carrying guns. The isolation deep in the rainforest made escape difficult. New workers always arrived at night when it was dark, “so we wouldn’t know our way back”, Nunes said. He recalled a labourer returning after a failed escape being told by the foreman: “There’s no point trying to leave. You’re going to have to work, boy.”

A spokesperson for the Volkswagen subsidiary said: “Volkswagen do Brasil rejects all the allegations presented in the records of the current investigation into Fazenda Vale do Rio Cristalino [ranch] and rejects the unilateral statements of facts presented by third parties.

“Volkswagen do Brasil and the public labour prosecutors have continuously exchanged views on this matter. The company reiterates its commitment to social responsibility and ethical values and will continue to contribute to the working conditions of its employees, as well as to the positive evolution of society.”