Japan's top two automakers lead the industry in the fuel-saving technology which runs on both electricity and gasoline, but Toyota has dominated sales with its groundbreaking Prius model, which is only available as a hybrid.

Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, said it was hard to know whether Honda could challenge Toyota's dominance.

"When you say 'hybrid,' the image that really comes to mind is Prius," he said. "Honda is very dependent on the US market, which is shifting towards things like hybrids, and for survival having a hybrid (model) is essential."

By twinning a conventional engine and battery-powered electric motor, hybrids currently add $5,000 or more to comparable gasoline models, a premium Honda Chief Executive Takeo Fukui sees coming down to around $2,000 in the next generation of hybrids.

"It is important to move hybrid vehicles from the current image-oriented stage to the new stage toward full-scale penetration," Fukui told a news conference.

Executive Vice President Koichi Kondo said Honda hoped to price the hybrid-only car under 2 million yen ($19,290).

Honda now only sells one hybrid car -- a gasoline-electric version of the mass-volume Civic sedan which starts at around 2.3 million yen -- after discontinuing its hybrid-only Insight 2-seater in 2006 and a hybrid version of its Accord in 2007.

Honda expects annual sales of 200,000 for the new hybrid. Total hybrid sales, including the Civic hybrid, a new hybrid version of its popular Fit subcompact and a planned sports car based on the CR-Z concept model, are expected to reach 500,000 vehicles a year after 2010, roughly one-tenth of total sales.

FIVE-DOOR, FIVE-SEATER

Announcing other details of the new hybrid-only car for the first time, Honda said the car would be a 5-door, 5-seater similar in design to its sleek FCX Clarity fuel-cell vehicle.

The car would use more compact and lightweight components for the hybrid system and have a new vehicle platform that places the control unit and battery underneath the cargo space.

A new production line for electric motors will be added at Honda's Suzuka factory in western Japan to more than double the production speed and cut costs.

Toyota is also racing to slash production costs for future hybrid cars. It has not disclosed when the third-generation Prius would be ready, although many expect a 2009 launch.

Toyota, the world's biggest automaker, is aiming to achieve annual hybrid sales of 1 million vehicles soon after 2010, also targeting roughly one-tenth of its total sales.

Few other automakers have managed to mass market hybrid cars after Toyota blazed the trail with the first Prius in 1997.

Nissan Motor Co, Japan's No.3 automaker, is due to launch its own, in-house developed hybrid car in 2010, the same year General Motors Corp plans to launch its plug-in hybrid, the Chevrolet Volt.

Honda shares ended down 2 percent in a weaker Tokyo market and have fallen about 11 percent this year, outperforming Toyota, Nissan and GM, which have fallen 13-24 percent.

MANUFACTURING INNOVATION

At its mid-year news conference, Honda also outlined plans to introduce new manufacturing methods at several Japanese factories to boost efficiency and lower costs.

Honda said it plans to invest about 158 billion yen to make the improvements at two domestic factories, one for engines and the other for cars. The car factory, in Yorii, near Tokyo, is due to start production in 2010.

A new minivehicle factory to be built by subsidiary Yachiyo Industry Co would also introduce innovations that would help Honda gain low-cost know-how, Honda said.

"Fundamental reform and improving cost competitiveness in the minivehicle market, where cost pressures and customer expectations are very severe, will enable Honda to gain a significant edge in fighting intensifying global competition in future," Fukui said.

Honda, which plans to improve fuel efficiency on bigger cars with clean-diesel technology, expects to sell more than 4.5 million cars and 18 million motorcycles worldwide in 2010. Last year, it sold 3.767 million cars and 13.48 million motorcycles.

(Additional reporting by Elaine Lies; Editing by Lincoln Feast)