PSA Peugeot Citroen and Toyota have officially announced they are to invest 1.5 billion Euros (£0.9bn) in the development of “small, cheap passenger cars for the European market”.

Speculation had been widespread that the two companies were planning a Smart car rival. According to Reuters the new platform will be in production by 2005 for a four-seater using either a one-litre petrol engine or a 1.4-litre diesel.

Neither has so far specified in which country or countries the production lines will be established but have said annual output capacity will be 300,000.

In a formal statement issued today the partners said: “Target customers include current buyers of used or outdated cars.”