BMW and Hyundai are discussing an alliance to develop engines and share other technology, a German report said.

An unnamed source 'close to the matter' told Reuters: "The talks are at early stages."

Another source said the companies had discussed a "comprehensive alliance" which included developing an engine and sharing the development costs but did not know if discussions were still on.

German industry newsletter Automobil Produktion said BMW was discussing sharing with Hyundai costs of up to EUR1-2bn (US$1.3-$2.6bn) developing a new family of engines. A Hyundai Motor spokesman said the report was "groundless".

Eugene Investment & Securities analyst Park Sang-won told Reuters the proposed collaboration could help BMW achieve economies of scale while giving Hyundai a chance to tap BMW's expertise with advanced petrol engines especialy those used in its large vehicles.

Collaboration could also reduce the cost of developing more fuel efficient engines as stricter emission rules are introduced, Sang-won added.

Chief executive Norbert Reithofer has dampened speculation BMW might expand partnerships beyond Peugeot, Toyota and Daimler and possibly General Motors.

BMW will supply diesel engines to Toyota from 2014 in Europe and the pair will collaborate on lithium-ion battery research for electric cars. BMW currently shares Mini engines with PSA.

Reithofer said at a press conference earlier this week: "Further co-operation partners are currently not foreseen."