The new car, codenamed the ULC, is expected to cost about $2,500 (£1,275) before taxes.

Under the terms of the deal, Bajaj will own 50 per cent of the new venture, while Renault and Nissan will each hold a 25 per cent stake.

Bajaj and Renault plan to make 400,000 units per year, with the launch date expected in 2011.

Indian car sales are predicted to more than quadruple to $145bn by 2016, but environmental critics continue to express concern over mounting air and pollution problems.

The announcement is the latest sign that carmakers are increasingly looking to developing markets to produce low-cost cars.

Chrysler has teamed up with Chery Automobile, of China, to develop an ultra-compact model, while General Motors may work with Wuling, its Chinese partner, and Volkswagen plans to sell a $3,500 car based on the Polo in India from 2010.

Meanwhile, Renault-Nissan could invest up to $1bn in a swappable-battery electric car project it is working on with California-based Project Better Place.

A deal was signed in January to begin mass producing electric cars to develop alternative energy sources and slash oil dependency.