Hyundai’s new generation i10 will be a direct challenger to the Volkswagen Up, according to the Maeil Business Newspaper in South Korea.

Insiders said the carmaker is "paying close attention to the development of the new i10" as the demand for small and compact cars grows amid economic slowdown in Europe.

Production of the i10 for Europe has been switched to Hyundai’s plant in Turkey and the model is seen as a driving force for the brand in Europe.

The new model will debut at the Frankfurt show in September and will go on sale in European markets later this year or early 2014.

Hyundai Europe capacity now 500,000