According to the ever-flowing and always active rumormill, Toyota may be working on a new low-cost hybrid to do battle with the revived Honda Insight, which is a bit smaller than its rival from Toyota and undercuts its price by a few thousand dollars (or a few million yen). Likely due in no small part to its low point of entry, Honda managed to move 18,000 Insight hybrids in Japan in its first month on sale, which is well above the automaker's early projections.
The new hybrid from Toyota would use similar hybrid components as the Prius but would use a smaller engine and cost 20-30% less. Even if these rumors are true, Toyota still plans to continue selling its previous-generation Prius in Japan for at least the 2010 model year alongside the new model, which features better performance from an enlarged 1.8-liter engine while still managing to reduce fuel consumption. So far, there's no indication that Toyota will sell a lower-cost hybrid model in the U.S.
[Source: Automotive News - Sub. Req.]