Toyota will supply Mazda with a small, full-hybrid car to sell in Europe.
The car will be based on the Toyota Yaris hybrid, Mazda said in its latest earnings report.
Mazda did not say where the model will fit in its European line up. It could replace the Mazda2, Autocar magazine said.
Adding a hybrid model will help Mazda to meet stricter CO2 emissions reduction goals set for automakers by the European Union.
Mazda last year announced an emissions-pooling deal with Toyota in Europe to avoid paying EU penalties if it misses its mandated reduction target.
In its earnings presentation last month, Mazda said that selling a Yaris-based car will be another way of achieving compliance with the stricter regulations.
Toyota's latest-generation Yaris full hybrid pairs a three-cylinder gasoline engine with a lithium ion battery for the first time to reduce CO2 emissions by more than 20 percent compared with the previous-generation hybrid, according to the automaker.
The current Mazda2 was launched in 2014 and overhauled last year to include mild hybrid technology. European sales of the Mazda2 fell 56 percent to 13,559 in the first 10 months, according to JATO Dynamics market researchers.
The new Mazda could be built in Toyota's factory in Kolin, Czech Republic, which currently builds minicars for Toyota, Peugeot and Citroen under a joint venture between PSA and Toyota.
Toyota will take full ownership of the plant next year.