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Toyota Motor Corp. and partner Isuzu Motors Ltd. will jointly develop a 1.6-liter diesel engine to power Toyota subcompacts, sources said Friday.

The plan calls for building a new Isuzu production facility by 2012 at a cost of several billion yen near an engine factory operated by one of its group firms in Tomakomai, Hokkaido, to supply about 200,000 engines per year to Toyota, the sources said.

The two automakers are also thinking of having Toyota build the engines in Europe, the sources said.

The two companies aim to hammer out the specifics by the end of July, the sources said.

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