Toyota will begin using a cheaper and smaller hybrid system from 2008, more than doubling production of the fuel-sipping vehicles by then to 600,000 units a year, the Asahi daily reported, according to Reuters.

Toyota is aiming to sell one million hybrid vehicles annually some time in the decade beginning in 2010, the news agency noted, and, since launching the world’s first petrol-electric hybrid car in 1997, has improved the powertrain with a second-generation system it calls THS II, which powers the latest Prius and new Lexus RX400h SUV, among others.

However, Reuters said, this hybrid system, which allows vehicles to run on an electric motor under certain driving conditions to save fuel, still costs manufacturers and consumers a premium of thousands of dollars over regular cars.

By making the system smaller, Toyota aims to slash the premium by half and expand its use to most of its mid-sized or larger cars, the Asahi reportedly said, without citing sources.

Reuters noted that Toyota executives have said they aimed to eventually make the powertrain available across the automaker’s entire product line-up.

Toyota has been pouring R&D resources into addressing the cost issue, but a spokeswoman told the news agency a target date for a third generation hybrid system had not been set.

“2008 is certainly a possibility, but we don’t know that yet,” she told Reuters.

According to Reuters, the Asahi said Toyota would begin making key components for the hybrid systems in the United States – the first time this manufacturing would be done outside Japan – in line with the auto maker’s stated aim to eventually procure such parts locally.