The model could be launched in the business year starting April 2007 and would be sold globally, the paper said.

A spokesman denied Honda had made any decision on whether to hybridise the Fit, but added it had the technological wherewithal to mount its hybrid system, which twins an electric motor and a conventional engine to save fuel, on most of its vehicles.

Chief Executive Takeo Fukui has long said the price premium for a hybrid over a gasoline-only car needs to fall below 200,000 yen ($1,680) for the powertrain to go mainstream.

With hybrid systems still costing auto makers - and customers - thousands of dollars, Fukui has said Honda had not made a strategic decision yet to produce the gasoline-electric vehicles in big volumes, unlike rival Toyota Motor Corp., which has aggressively promoted their proliferation.

A decision to offer a hybrid version of the mass-volume Fit - Honda's best-selling model in Japan and due to debut in the United States soon - would suggest the auto maker is a step closer to committing to the powertrain longer-term.

Honda also sells hybrid versions of its two best-selling cars, the Accord and Civic, at a premium of around 300,000 yen ($2,525). Its hybrid-only Insight coupe was the first gasoline-electric car to be sold in the United States.

Honda is developing a smaller motor and battery to reduce the hybrid's cost and weight, the Nihon Keizai said. It will twin the hybrid unit with a one-litre engine for the Fit, the paper added.

Toyota also aims to halve the production and selling cost of a hybrid system. It currently sells many of its hybrid models at a premium of around 500,000 yen ($4,200).

Honda, Toyota and Ford Motor Co. are so far the world's sole mass-producers of hybrid passenger cars. Laggards like General Motors Corp. argue that hybrid systems are most suitable for large vehicles due to the added weight from the extra components.

Compact cars are also generally fuel-efficient to begin with, and the extra cost of a hybrid car may be more difficult to justify, depending on how much can be saved at the pump.

The newspaper said the Fit hybrid would have fuel economy comparable to that of the Honda Insight and Toyota Prius, which the auto makers advertise in Japan as getting around 35-36 km to a litre (82-84 miles per gallon).

The most fuel-efficient gasoline-only Fit, with a 1.3-litre engine and continuous variable transmission, gets 24 km to a litre (56 miles per gallon).