Autocar has learned that Volkswagen is fast-tracking development of an affordable new two-seat city car.

In its most economical form, the new VW will return a class-leading 141mpg and emit less than 60g/km of CO2 – all without hybrid drive.

The three-door hatchback is set to go head-to-head with the Smart and Toyota iQ. It is strongly tipped by VW insiders to be called Chico after a VW concept car from 1991, and will become the entry-level VW, below the Up!.

It could cost as little as £6000 when it goes on sale in the UK in 2011.

The new VW will be based on a modified version of the chassis from the Up! The car has a comparatively low roofline and narrow track aimed at providing it with class-leading aerodynamics.

VW chairman Martin Winterkorn says this is vital to achieving the fuel consumption and emission targets planned for the car: “The Up! has a tall design and as a result there are limits to its overall aerodynamic performance,” said Winterkorn. “Our newest car is a good deal lower and because of this it carries a lot less drag.”

Inside, there is space for two adults and a limited amount of luggage in a layout not dissimilar to the Smart city car.

The new Volkswagen will use a new 1.2-litre four-cylinder direct-injection petrol unit with a cylinder shutdown device that allows it to run on just two cylinders. It will be joined by a 1.2-litre three-cylinder common-rail diesel, which will be introduced in next year’s new Polo.

Stop-start technology, regenerative braking and low rolling resistance tyres will be standard features.

Volkswagen had envisaged a new range of two-cylinder engines for the city car but found that they required relatively high revs in the initial drive-off phase, negating any advantage in fuel consumption and emissions over the larger engines.

VW is also looking at an electric version using battery technology from Toshiba. This rival to the Smart ED is under development at a new electric vehicle development centre established by Volkswagen in Isenbuettel near Wolfsburg in Germany.

Greg Kable