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Robert Bigelow, an American hotelier who says he wants to open up space to the general public, is ploughing more than £280m into the project.
The blow-up structure will be launched on rockets and self-inflate to its full size once it is circling the globe.
Its 1ft-thick skin, made from a toughened combination of multi-layered polymer and Kevlar, will allow it to expand while keeping the astronauts protected from space meteorites.
The project is part of a growing interest in opening space up to tourism and other businesses. Sir Richard Branson, the Virgin founder, is involved in one high-profile scheme.
The Bigelow project was begun at Nasa but the agency abandoned it in 2000 mainly for financial reasons. Bigelow bought it and turned it into a design for a hotel.
If the inflatable model can be made to work, it will be possible to assemble large structures in space with far fewer launches from Earth than the current method — used in the International Space Station — of connecting up numerous rigid sections, each of which requires its own launch.
Two prototypes will be launched later this year using former Soviet missiles.
The sections, built at one third of the station’s eventual size, will inflate when they reach “low Earth orbit” at 120-360 miles altitude. After two years they will be abandoned and left to burn up in the Earth’s atmosphere.
The project will test whether the modules can survive hazards such as higher radiation and space debris.
In addition to being used as a hotel, the structure may be leased to astronauts and pharmaceutical companies wanting to use it as a medical testing centre.
Bigelow hopes the hotel, which would open some time after 2015, will also be in demand as a shooting location for film-makers.
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