Toyota, long king of the hybrid heap with the Prius, soon to be released in its third generation, will answer Honda's new inexpensive Insight hybrid, which opens at $20,000, with a Yaris spin-off.

Akihiko Otsuka, chief engineer of the third-generation Prius said, "We are developing a low-priced hybrid vehicle like Honda's Insight. 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."

His statements, carried in Japan's Nikkei business newspaper did not include a timetable for the new, smaller hybrid, but it could be on showroom floors as early as 2011.

The current, second generation Prius, carries a base price of $22,000 and the new version is expected to be even more expensive, making the Honda Insight a significant threat to Toyota's hybrid dominance.

Otsuka indicated that development of the Yaris hybrid would be less expensive than work on the Prius, with core technologies for the vehicle brought in-house. Toyota currently makes the Prius motor and inverter and is developing its own lithium ion batteries.

Currently, the company relies on a joint venture with Panasonic for the nickel-metal hydride batteries used in the Prius. Honda will team with GS Yuasa Corp of Japan to make its own lithium ion power packs. The Insight has nickel-metal hydride packs from Sanyo.