The new Smart, due in 2013, will replace the ForFour (as pictured) that was killed off in 2006 due to poor sales and is planned to sit on a lightly modified version of the Renault Twingo's underpinnings.
The new Smart will also feature a dedicated (plug-in) electric version to be based on Renault partner Nissan's new Leaf EV.
It is expected the announcement will be made official at the upcoming Frankfurt auto show, where Smart has previously stated it will reveal further details about the future of the Smart brand.
So far Smart have hinted at three new models by the middle of the next decade including a radical three-seater sports car.
At this early stage, it is not known whether the deal between Mercedes-Benz and Renault will extend to engines and gearboxes, although German media reports have suggested that the two are looking at deep integration between the new ForFour and the Twingo in a move aimed at extracting the sort of economies of scale achieved by rival carmakers PSA/Peugeot-Citroen and Toyota with their similarly sized C1, 106 and Aygo.
This would suggest further collaboration on small-capacity petrol and diesel units, including possibly a new generation of highly efficient three-cylinder engines already under development at Mercedes-Benz.