The move comes as the Japanese auto giant aims at solidifying its position as the leader in eco-friendly vehicles by tapping the technology of a capital tie-up partner, the Nihon Keizai Shimbun said.

Isuzu will invest about 30 billion yen (243.82 million dollars) to build a diesel engine plant to exclusively supply products for Toyota, which plans to use the engines in passenger cars sold in Europe, the newspaper said.

The new facility is expected to produce 200,000 units a year from 2012 on, the report said.

Diesel-powered vehicles emit 20 percent less carbon dioxide than gasoline vehicles but release such pollutants as particulate matter and nitrogen oxides, posing a technological challenge for automakers.

With other Japanese carmakers rushing to develop next-generation diesel engines, Toyota -- which has been the leader in hybrid cars -- is aiming to establish a solid footing in diesels as well, the paper said.