Volkswagen and DaimlerChrysler have announced that they are to establish a diesel engine partnership.

The agreement will oblige Volkswagen to produce 120,000 two-litre four-valve 100 KW (136 hp) turbo diesels engines annually from 2005 until 2013.

The engines will be deployed in Chrysler vehicles and also future models produced as part of DaimlerChrysler's alliance arrangement with Mitsubishi.

The cars will only be sold in Europe, and provide an answer to Mitsubishi's problem regarding the prohibitive cost of developing engines which comply with emissions regulations to be applied form 2005.

The announcement is a further manifestation of the growing popularity of diesel, caused by both emissions rules and the general economy of the fuel in cars.

DaimlerChrysler has made similar moves in America, with the roll out of the diesel version of the Liberty jeep among other projects.