The new generation Prius isn't due to arrive in the US until May, although it is expected to be priced higher than the previous model which is already more expensive than the Honda Insight, causing Toyota to rethink its strategy.
Chief engineer of the new generation Toyota Prius, Akihiko Otsuka, said the top priority in developing the new Prius was to boost fuel efficiency, not reduce the price.
"We are developing a low-priced hybrid vehicle like Honda's Insight," Otsuka said. "We are going to compete by expanding our hybrid-vehicle lineup to smaller hybrids, in the class of the Vitz (sold in Japan) and Yaris."
Otsuka confirmed that the new model would be cheaper than the Prius, but would not go so far as to say that it would also be more affordable than the Insight.
Although, it seems Toyota may already have an even lower price to beat with Honda currently developing a small hybrid vehicle based on the Jazz.
Otsuka wouldn't mention when the Yaris-sized hybrid would be released, but it could arrive as early as 2011, according to Japan's Nikkei business newspaper.
Toyota's current hybrid strategy involves bringing the core technologies in-house, with the electric motor and inverter for the Prius currently are manufactured by Toyota.