Renault-Nissan has tied-up with Bajaj Auto, the Indian motorbike manufacturer, to create an "ultra low cost" car that will compete head-on with Tata's £1,250 Nano.

The move represents the latest effort to put the Third World on wheels by selling cars that cost no more than laptop computers, with plans to produce a vehicle that will cost about $2,500 before taxes – precisely the price point that will be occupied by the Nano, the world's cheapest car, when it hits India's roads later this year.

The new car – codenamed the ULC (ultra low cost) – will be made and sold in India with the first models due in early 2011. An initial production capacity of 400,000 units a year is planned. Its producers hope to export to other emerging markets later, using Renault-Nissan's global sales network.

Tata, which initially hopes to sell the Nano to middle-class Indian families keen to trade up from their motocycles, also intends to take its small car overseas, but not for several years.

Already, however, the Nano has made an impact globally: the car shook the industry to its core when it was unveiled in January – chiefly because it sported a price tag that would barely cover the cost of a CD player in a Lexus.

With oil prices hovering at record highs, a host of automakers plan to follow Tata's lead by targeting developing markets – and green-minded consumers in the West -- with a new generation of cheap and efficient runabouts.

Hyundai, Toyota, Volkswagen and Ford are among those overhauling their own small car plans. Chrysler has teemed up with Chery Automobile, the Chinese group to develop a new ultra-compact model. General Motors has suggested it may work with its Chinese partner, Wuling, to do the same. Volkswagen plans to sell a $3,500 car based on the Polo in India from 2010.

The new joint venture will be 50 per cent-owned by Bajaj, with Renault and Nissan, who co-operate under an alliance pact, controlling 25 per cent each.

By 2012 analysts expect worldwide sales of small cars to have risen by two thirds from a decade earlier, to about 65 million a year.

Even in the United States, where oversized pick-up trucks have ruled the road for a generation, sales of small cars are booming. Last year, sales of "subcompact" models rose by a third in the US, driven by the popularity of the Toyota Yaris and the Mini Cooper. Ford now intends to import the Fiesta to its home market from Europe.

The biggest target, however, remain emerging economies. Within eight years, 100 million households in countries such as India and China will be able to afford cars priced under £3,000 – the cost of Renault's successful basic model, the Logan – according to Boston Consulting Group.

For Bajaj the Renault-Nisan partnership represents a turn into new territory. The company is India's second largest motorbike maker and the leading manufacturer of three-wheelers, but is yet to build a passenger car.

However, Carlos Ghosn, the chief executive of the French-Japanese Renault-Nissan alliance, has suggested that what his Indian partner lacks in experience of building four-wheelers it makes up for with its knowledge of the subcontinent's consumers and testing road conditions.

Mr Ghosn recently said he was "very bullish" on the prospects for an ultra-cheap car. "We're not trying to do it in Japan or Paris; we're asking Bajaj to do it," he told Newsweek magazine. "We don't know how to do a car like this, but for them it's a natural evolution."

Explore Industry Sectors

• Banking & Finance

• Construction & Property

• Consumer Goods

• Engineering

• Health

• Industrials

• Leisure

• Media

• Natural Resources

• Retailing

• Support Services

• Technology

• Telecoms

• Transport

• Utilities

Times Recommends

• B&B shareholders forced into funding rescue
• John Lewis department store sales plunge 8.3%
• Families turn to credit to cover mortgage bills