The forthcoming Fiat Topolino budget hatchback will be produced at the Zastava plant in Kragujevac, sources in Serbia have reported.

Fiat signed a memorandum of understanding with Zastava earlier this year, the Italian car maker planning to use Kragujevac’s under-utilised plant and local car-building expertise to increase production capacity.

Although Fiat has not confirmed that its new budget car will carry the Topolino name, the company has committed itself to creating a new ultra-cheap city car beneath the current line-up – and plenty of detail about the fascinating project has leaked out.

Insiders say the Topolino will be less than three metres long, and will be powered by a new two-cylinder petrol engine that will come in both normally aspirated and turbocharged form, producing around 65bhp and 90bhp respectively.

The new motor uses a cost-saving iron engine block in place of aluminium, but features Fiat’s innovative ‘MultiAir’ variable valve system, which should make it impressively clean: the company is believed to be targeting CO2 emissions of less than 90g/km.

When the Topolino goes on sale in 2010 it will be the first two-cylinder car to be sold across western European markets since the demise of the Citroen 2CV.

In richer markets it will be sold as a small, stylish city car – while in developing markets it will be pushed as a value choice, with pricing set to start at about €6500.

Mike Duff