Isuzu Motors and Toyota Motor Corporation (TMC) on Thursday said they had agreed to collaborate on the development, production and supply of small diesel engines.

Isuzu, a truck and diesel engine specialist, and TMC last November signed a memorandum of understanding to examine the likely benefits of cooperating.

The two automakers will develop is a 1.6-litre engine with aluminium cylinder block for use in Toyota vehicles sold in Europe.

Toyota currently offers in-house developed 1.4-litre and two-litre turbodiesels in its European car lines which are built mostly in the UK (Auris and Avensis), France (Yaris) and in a joint small-car venture with PSA in the Czech Republic (Aygo). Other models are made mainly in Turkey, Thailand and Japan.

A Toyota Motor Europe spokesman told just-auto that 38.8% of vehicles the unit sold last year had diesel engines, up from 34% in 2003 and 36% in 2004. He added that the company's current unit sales target for 2007 was now 1.22m units.

"Both companies will maximise use of their technological capabilities and expertise to develop and produce an engine with the world's highest performance," Toyota and Isuzu said in their statement.

The pair said they would begin discussions on developing, production and supply of the diesel engine, but in principle, Isuzu would play the leading role. Production would begin around 2012.

"The two companies intend to hold continuing talks over the creation of a comprehensive cooperative framework that will contribute to their mutual competitiveness and development over the long term," the statement added.

In the US, Toyota has a cooperative factory-sharing deal with another smaller Japanese automaker, Fuji Heavy Industries, with whom it assembles Camry models in an Indiana facility that also builds Fuji's Subaru vehicles.