Ford and Fiat have signed an agreement to cooperate on the joint development and production of vehicles in the European small car (sub-B) segment.

The cooperation will spawn two small cars, the new Fiat 500 and the replacement of the Ford Ka.

The companies said: “By working together, we will benefit substantially from reduced development costs and economies of scale in manufacturing and component sourcing.

“The result will lead to better value and increased quality for customers, while retaining the brand characteristics of each vehicle.”

Fiat and Ford are already working jointly on the development of the new vehicles. The current Fiat Panda platform will be the basis for the development of the new cars, which will be manufactured in Fiat's existing Tychy facility in Poland, where Ford engineers will contribute to the development of their models.

The vehicles will use Fiat engines built in Poland and Italy and will go on sale at the end of 2007. Projected annual volume has been set at around 240,000 units, divided evenly.