Toyota said Tuesday it will produce hybrid cars in Australia, whose Prime Minister Kevin Rudd is trying to battle spiralling fuel prices and revive the country's ailing auto industry.

Rudd met with Toyota Motor Corp. chief Katsuaki Watanabe at the auto giant's headquarters in central Japan, as the two announced the company would build the Toyota Camry Hybrid by 2010 at an existing factory in Melbourne.

Toyota, which plans annual production of 10,000 vehicles, will benefit from a 35-million-Australian-dollar (37-million-US) subsidy from Canberra to be used in research and development.

Rudd said increased popularity of the hybrid would help Australia cut back on emissions blamed for global warming.

"This hybrid will use one-third less petrol than a standard car, one-third less emissions and therefore for an average family ... savings of up to 1,000 dollars a year," Rudd told a joint news conference with Watanabe.

"Australia must do whatever we can to assist Australian motorists who are faced with the challenge of rising fuel prices and also... in our overall efforts to bring down greenhouse gas emissions," he said.

Rudd has called for a transformation of Australia's auto industry, which has shed more than 11,000 jobs since 1996, by launching a 500-million-Australian-dollar fund to assist the development of green cars.

Toyota, poised to overtake General Motors this year as the world's top automaker, was the pioneer of hybrids, which deliver power by switching between a regular engine and an electric motor.

It primarily produces the hybrid in Japan but also in the United States and China. Toyota is expected to announce it will also build the vehicles in Thailand.

The Altona plant in Melbourne employs 4,500 workers, which will go up slightly with production of the hybrids, Watanabe said.

Watanabe said that Toyota hoped to boost its sales in Australia.

"Due to Australia's high interest in global warming and environmental issues, we are confident that the Camry Hybrid will be welcomed there," Watanabe said.

"Toyota's hybrid system, which controls emissions and contributes to cutting down on petrol consumption, is our core technology," he said.

Toyota's hybrid output jumped 25 percent to 430,000 units in 2007. The company aims for production to jump to one million units in the early 2010s.

Australians buy one million cars a year and only 5,000 are hybrids, Rudd said.

"Australia needs to do better and more on the question of fuel-efficient vehicles," he said.

Australian Industry Minister Kim Carr, who was travelling with Rudd, hoped that the benefits of Toyota's investment would spill over to other sectors.

"We want to see a rapid transformation of the Australian automotive industry because... it affects so many other industries -- steel, plastics, electronics and even aerospace," Carr said.

Rudd is paying his first visit to Japan since taking office last year.

His visit is aimed in part at easing concerns in Japan that the Mandarin-speaking former diplomat favours Beijing. He visited China as part of his first major international trip but not longstanding ally Japan.