Volkswagen has fast-tracked development of a two-seat, three-door city car to compete with the Toyota iQ and Smart, based on the Up concept. Sources say the car will be called "Chico" and could be in production by 2011.

Insiders report that Volkswagen doesn't plan to be left out of the growing city-car market. The brand that practically invented the "people's car" is fast-tracking a shortened production version of the Up concept to compete with the Toyota iQ and Smart fortwo. The new entry-level car is expected to be called "Chico," using the name of a 1991 Volkswagen concept car.

The two-seat, three-door subcompact will be laid out similarly to the Smart fortwo, and shares underpinnings with the Up but is shorter and lower to reduce drag and improve fuel economy. Design cues will be similar. Projected powertrains include a 1.2 liter four-cylinder gasoline engine with cylinder deactivation, a 1.2 liter three-cylinder common-rail diesel shared with the next-generation Polo, and Volkswagen is considering the possibility of an electric Chico as well. Fuel economy projections range from 117 to 141 mpg for the diesel. Efficiency will be further improved with regenerative braking, stop-start fuel shutoff systems, and low rolling resistance tires.

The frugal Chico could be on sale in the UK as early as 2011, with a £6000 starting price. If there are plans to sell the car in the U.S., Volkswagen hasn't revealed them yet.