Spanish Minister for Industry Joan Clos said during a bilateral meeting on Friday that the goal was to build an alternative to the high-polluting vehicles currently on the roads of Spain and Portugal.

The green car, which could be powered by hydrogen fuel cells or electricity, is expected boost an industry that has lost hundreds of jobs to countries with lower labour costs.

"We want to create the technology that will allow us to consume the least amount of gasoline possible," said Clos. "At this point there are high expectations (for the green car)."

Experts say oil prices close to $100 a barrel make it more attractive to invest in cars that can run on electricity or hydrogen fuel cells.

The Mobi-green car, as the vehicle is named, is being developed by two automotive research centres in Portugal and Spain using funds from both the public and private sectors.

The head of Portugal's CEIIA research centre, Braz Costa, said he hoped to produce a prototype by the end of the year. He said the car's engine was likely to run on hydrogen fuel cells but an electric engine remained an option.

"Our goal is to create an environmentally friendly car that can be produced with technology from Portugal and Spain," Costa told Reuters. He declined to say how much the new car would cost consumers.

"We are involving the private sector to take on the challenge of producing the car in the long-run and sell it to consumers," he said.

Costa said demand for green cars would rise as pressure to cut carbon dioxide emissions mounted on governments around the world.

"There is a paradigm shift. There are drastic changes taking place in the economy and the way we view transportation," said Braz Costa.

"When governments decide to charge an environment tax on high-polluting vehicles we are certain drivers will start looking for alternative ways of transportation."