It currently mounts the system on seven models, including the hot-selling Prius sedan, and has targeted sales of 1 million hybrid cars annually soon after 2010.

Outlining its efforts to help the environmental cause, Toyota said it was working on improving technology across the powertrain spectrum -- alternative-fuel engines, diesel engines, gasoline engines and electric cars -- but stressed that hybrid technology was crucial in boosting the performance of each system.

"We believe that hybrids will be the core technology in the 21st century," Masatami Takimoto, executive vice president in charge of technology development, told a news conference.

Toyota's pitch comes at a time when many of its domestic rivals including Honda Motor Co., Nissan Motor Co. and Toyota affiliate Fuji Heavy Industries Ltd. have been unveiling plans to step up their development of diesel engines -- touted as a proven powertrain with superior real-life mileage, torque and towing power.

With gasoline prices rising and climate-change concerns growing in the public's mind, hybrids have grown in popularity in North America, and to a lesser extent Japan. But in Europe, they are losing the battle to diesels, which are cheaper to produce and get 20-30 percent better fuel economy than gasoline cars.

Earlier, DaimlerChrysler AG, one of the most vocal proponents of diesel engines, held a separate briefing just outside Tokyo to outline their merits in a country where diesel cars have a reputation of being noisy, dirty and slow.

"I know there is a lot of prejudice against diesel in this country," DaimlerChrysler Japan President Hans Tempel said, urging reporters to test-drive its newest clean-diesel cars flown in from Britain for the occasion.

"Today's diesels are fun to drive, not just on the highway or cross-country," he said. The Stuttgart-based auto maker is set to launch the Mercedes E320 CDI sedan in Japan this fall -- the country's first new diesel passenger car in four years.

Joachim Schommers, a director at DaimlerChrysler in charge of diesel engine development for passenger cars, acknowledged that one powertrain could not be the sole answer for reducing carbon dioxide emissions, but said hybrids were far more expensive to build and that diesels were a more viable short-term solution.

Toyota President Katsuaki Watanabe conceded that the price premium on hybrids was still too steep and that battery technology needed more work, but said the auto maker was close to addressing those issues.

"The biggest task is to halve the cost for hybrids, and we're seeing light at the end of the tunnel."

Takimoto added that costs to develop advanced diesel technology to comply with tight emissions regulations to be introduced in a few years in the United States and Japan would add up, making such cars too expensive to justify the benefits.

"The potential for diesel technology is high, but whether the market would accept the high prices is a separate issue," he said, adding that Toyota was not thinking now of offering diesel cars in Japan.

Toyota executives stressed the auto maker did not have all of its eggs in the hybrid basket, saying it would offer the most suitable powertrain depending on market needs.

As part of those efforts, Toyota said it would introduce in the spring of 2007 flex-fuel vehicles that can run on 100 percent ethanol in Brazil, where sugar cane-based ethanol is widely used.