Ford and Fiat have agreed in principle to work together on developing two small vehicles for the European market, Ford said on Friday.

"The two new vehicles that would be involved, with highly differentiated designs, would be a new Fiat 500 and a replacement for the current Ford Ka," it said in a statement.

"By working together on this project, both companies would envisage reduced development and material costs, while providing highly competitive products to the marketplace," it added.

The accord follows strategic discussions on whether to cooperate on a car in the "sub-B" sub-compact segment that would be the basis for the two models.

The talks reportedly went so well that the partners have signed a memorandum of understanding to proceed with the project.