It is set to become one of the key experiments on ExoMars, Europe's next mission to the Red Planet in 2011.
The Life Marker Chip (LMC) will test soil samples drilled from below Mars' surface for specific molecules that can be associated with life.
The results might not be a definitive proof of the existence of microbes, but they could still provide tantalising evidence for their possible presence.
A UK-led international consortium is developing the technology.
On Monday, it was awarded £0.5m (0.7m euros) to advance the system's design and demonstrate such an instrument can be made small enough and light enough to be flown half a billion kilometres to Mars.
"As ever on missions like ExoMars, the mass constraints are very tight - we're trying to get the whole package down to about 800g," said Dr Mark Sims, from Leicester University.
"Essentially, you're looking at something that's the weight of a mobile phone in a lunchbox," he said.
The £0.5m is part of a £1.7m (2.5m euros) package of R&D investment announced by the UK's Particle Physics and Astronomy Research Council (PParc) to enable UK scientists and engineers to develop key instrumentation and technologies for the ExoMars mission.
The £410m (600m euros) European Space Agency project (Esa) was approved by ministers last December. The current vision is for a 180kg (400lbs) rover that would study Mars' environment and geology.
It would also carry a range of instrumentation capable of investigating the planet's life potential - past and present.
The LMC would be a key component of ExoMars' "Pasteur Laboratory".
Dr Sims' team is now engaged in a 20-month study that expects to turn the chip instrument from an exciting concept into a working prototype.
The Life Marker Chip will look for the presence of molecules such as amino acids, the building blocks of proteins; and adenosine triphosphate, the critical molecule involved in energy transfer in cells.
To make a detection, the ExoMars rover would drill down into the Martian soil with a mole and pull a sample into the Pasteur housing. There, the sample would be ground up and treated with solvents to pull out any organic (carbon-rich) material.
The fluid would then be passed through a test channel in the LMC.
The technology exploits the fact that molecules will only bind with other molecules of a particular shape - essentially a "lock and key" approach. If one of the target molecules is present in the fluid, it will bind to a prepared receptor in the test channel.
It is a process that is very similar to pharmacy testing kits that detect the presence of a hormone associated with the early stages of pregnancy.
"The pregnancy testing kit is a good analogy," said Dr Sims. "The fluid flows across a molecular receptor array; but instead of getting a 'blue line', we see dots where the compounds are bound to the surface; and they will actually fluoresce."
He added: "If [Martian life] has a chemistry similar to life on Earth, we will see it."
Britain has promised more than £70m (100m euros) to Esa's Aurora Solar System exploration programme, of which the ExoMars project is the major focus.
The UK is the biggest "subscriber" after Italy and can expect a sizeable number of contracts to come its way when Esa invites final tenders to build the mission's components.