The two-seat XL1 prototype, launched at the Qatar Motor Show, consumes as little as 0.9 litres of fuel per 100 kilometres and emits just 24 grammes of the greenhouse gas carbon dioxide per kilometre.
Volkswagen, which is based in Wolfsburg and is Europe's largest automaker, said in a statement the new prototype brought the ''vision of the 1-litre car close to production maturity.''
It follows an earlier prototype the L1, which daily Bild reported is set to go into full production for release in 2012 and is expected to cost about €20,000.
“No other hybrid car powered by an electric motor/internal combustion engine combination is more fuel efficient,” Volkswagen said in its statement.
The car has a lightweight monocoque body, or structural skin, made partly from carbon fibre-reinforced polymer, the same as parts used in Formula 1 cars. Volkswagen said the body design had a very low aerodynamic drag.
Its plug-in hybrid system consists of a two-cylinder turbocharged TDI engine with 48 horsepower and an E-motor with 27 horsepower. It has a seven-speed, dual-clutch transmission and a lithium-ion battery.
The car can be driven up to 35 kilometres in purely electric mode meaning it has no carbon emissions up till that point.
The battery can be charged from a household power socket. The battery is also charged by the energy captured by slowing down.
Volkswagen said in its statement the XL1 was the third stage in the evolution of its 1-litre car strategy, which was kickstarted by Ferdinand Piëch, who is now chairman of Volkswagen’s supervisory board, at the turn of the millennium.
The carmaker said it aimed for the XL1 to be practical, with wing doors that make it easy to get in and out.