The new car, to be built at the company's Belvidere assembly plant in northern Illinois, will be based Fiat's C-EVO platform and replace the aging Dodge Caliber, the Detroit Free Press reported, citing unnamed sources familiar with the plan.
The new model will be marketed as a Chrysler, but the company's Jeep brand may also get a version of the vehicle. It will resemble the Alfa Romeo Giulietta (pictured), which Fiat introduced in Europe earlier this year.
Chrysler is one of the least fuel-efficient automakers in the U.S. market. The Auburn Hills, Mich.-based automaker needs a high-mpg car to help meet new federal mandates that require automakers' fleets to average 35.5 mpg by 2016.
The new engine will be produced at Chrysler's Dundee plant in Michigan and installed in Fiat 500 models assembled in Mexico. The engines may also be shipped to Belvidere for use in vehicles produced there.
Chrysler is spending $150 million to retool the Dundee facility, and is seeking as much as $10 billion in loans from the Department of Energy for new-engine development, Reuters reported Wednesday.
In addition to meeting new stringent standards, a gas-sipping small car would help Chrysler better compete against rivals General Motors and Ford Motor (F), both of which have introduced new fuel-efficient cars this year capable of 40 mpg.