BMW will build a front-wheel-drive car - to sit below the 1 Series small family car - at its Mini factory in Oxford.
The Rocketman concept car, revealed at the 2012 Geneva motor show, could give clues to how the car might look, and it could share many of its mechanical parts with the Toyota iQ.
Last week, BMW and Toyota signed a memorandum of understanding pledging to expand their existing co-operation, which was announced in December 2011.
Speculation is mounting that this new car could be the first modern BMW to have a name rather than an alphanumeric - rumours suggest that Isetta, the name of its 1950s bubble car, is being considered.
Pete Tullin/Iain Reid