But Masatami Takimoto, executive vice president in charge of powertrain development, said cost-cutting efforts on the system's motor, battery and inverter were bearing fruit, and the cost structure would improve drastically by the time Toyota reaches its sales goal of one million hybrids annually in 2010 or soon after.

"By then, we expect margins to be equal to gasoline cars," he told Reuters in an interview at Toyota's headquarters in Toyota City, central Japan.

If it succeeds, Toyota, on its way to becoming the world's biggest carmaker, will be removing the main hurdle to cost-competitiveness for the hybrid -- the expense of the powertrain, which twins a conventional engine with an electric motor. It will also likely widen its sales lead as more consumers seek better mileage amid rising fuel costs.

Data this week showed US gasoline prices at an all-time high above US$3 a gallon, and Takimoto said he expected energy prices to continue rising.

Toyota likely achieved cumulative hybrid sales of one million units this month, having moved 998,900 by the end of April. By 2020, Takimoto said he expected hybrids to become the standard drivetrain and account for "100 percent" of Toyota's vehicles.

In 2006, it sold 313,000 units, accounting for the majority of the world's hybrid cars, and aims to lift that to 430,000 units this year with ramped-up production of the popular Prius.

With endorsement from Hollywood stars such as George Clooney, Toyota struggled for years to keep up with demand for the second-generation Prius. But sales began to suffer late last year after US tax credits whittled down for the model, prompting Toyota to offer incentives of up to US$2,000 on each Prius.

Pundits said that was pressuring already-tough margins on the hybrid. But Takimoto said he saw little impact on profitability before and after the incentives appeared, mainly thanks to larger volumes -- Prius production will rise by 40 percent to 280,000 units this year -- and the ongoing efforts to shave costs.

"There really hasn't been that much of a difference in margins," he said, adding: "In a sense, you could say things are finally normalising now. The Prius will soon enter its fifth year, and all this time we had no incentives on it."

Toyota does not disclose its costs or margins on its cars.

Industry watchers expect the current Prius to be remodelled late next year or in early 2009, using a lithium-ion battery for the first time. Takimoto declined to confirm the speculation, but added that Toyota's lithium-ion battery, under development with Matsushita Electric Industrial Co., was technically ready to be mounted on hybrid cars "any time".

BATTERY BREAKTHROUGH

Eager to match Toyota's green image, domestic rival Nissan Motor Co. announced plans last month to form a joint venture with electronics giant NEC Corp. to mass-produce lithium-ion batteries to be used in environmentally friendly vehicles such as hybrids and plug-in hybrid cars.

Mitsubishi Motors Corp. followed this week with a similar plan, partnering GS Yuasa Corp. and Mitsubishi Corp. Both ventures want their batteries to become the de facto standard for the auto industry.

Takimoto said Toyota had been approached by both parties as well as many other battery makers, but dismissed their products as "unusable" due to their low energy density.