Toyota is developing a hybrid priced lower than its Prius to compete with Honda’s cheaper Insight, which was launched recently in Japan and is about to go on sale in the US and Europe.

Japan’s Nikkei business daily paper reported on Friday Toyota’s planned petrol-electric car would sell for under JPY2m (US$20,510) as early as 2011 in Japan, according to Reuters.

As we reported last month, Honda launched its new hybrid in Japan with executives making it clear the company wanted the  five door hatchback to compete strongly on price – JPY1.89m.

The Nikkei said Toyota planned to price its new hybrid model 20-30% cheaper than the outgoing JPY2.33m Prius by modifying Prius parts.

The new car would be a subcompact with a petrol engine smaller than the outgoing Prius’ 1.5-litre unit (the Insight has a 1.3), and sales might expand overseas, the paper said, adding that Toyota was planning to sell the new, fully redesigned, 1.8-litre Prius in Japan from JPY2.05m to match the Honda.

Toyota declined to comment.

Honda’s global Insight sales target is 200,000 units a year with Japan accounting for 60,000. The car was launched there with 5,000 orders already on the books and had attracted 10,000 within 10 days of arrival in showrooms.

Honda said earlier this week dealers had ended up taking orders for 18,000 units in the first month.

The Insight has since been priced at GBP15,490 here in the UK (sales from April) and goes on sale at US$19,800 in the US on 24 March.