Honda Motor Co 's new hybrid car will cost one fifth less than the cheapest hybrid on the Japanese market, according to a newspaper report -- a move that may make hybrids low profit margin models for automakers.

The new car will cost around 1.5 million yen ($16,570), making it the cheapest hybrid in Japan when it goes on sale this autumn, the Nikkei business daily said.

It will cost about 400,000 yen less than the Insight, Honda's other hybrid offering, and about 200,000 yen more than Honda's popular gasoline-powered Fit compact car, it said.

Lower prices are good for consumers but not for shareholders, said Yoshihiko Tabei, an analyst at Kazaka Securities.

He added that the reported price was lower than the market had expected and could lead to a punishing price war with Toyota Motor Corp as well as put both automakers at a disadvantage when compared with rivals who just focus on higher margin gasoline-powered vehicles.

Toyota has finally begun enjoying profits on the Prius and Honda is barely making profits on the Insight. It will be tough for them to make profits on hybrids.

A Honda spokeswoman declined to comment on the report.

The new hybrid will be based on the Fit and share core components with the Insight, reducing Honda's development costs, the Nikkei said, adding that it will be able to travel 30 kilometers on a liter of gasoline, compared with the Fit's 24 kilometers per liter.

Price competition between Honda and Toyota in the growing hybrid car market has heated up since the debut of the Insight hybrid in February 2009, which was quickly followed by the launch of the cheapest-ever Toyota Prius hybrid.

The relatively low prices of the two latest flagship hybrids, as well as tax incentives for green cars, has helped popularize hybrid cars in Japan.

With prices in the popular range of 1.5 to 1.6 million yen and with the performance of a conventional gasoline-powered vehicle, hybrids will be increasingly popular even without tax incentives, Tabei said.

Shares of Honda dipped 0.6 percent to 2,704 yen while Toyota slipped 0.6 percent to 3,200 yen, underperforming the Nikkei stock average which inched up 0.2 percent.

(Additional reporting by Abhiram Nandakumar in Bangalore; Editing by Edwina Gibbs)

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