The low carbon dioxide emitting 2.2 TiD 120bhp engine is evolved from the 2.2-litre unit in the Saab 9-3, but has been tweaked.
It will be available in the UK in April and will be priced at about £20,495 - with a £1,200 premium for the estate - in Arc, Linear and Vector trim.
The new engine will initially be available with a five-speed manual gearbox, while an automatic version will be available in late summer.
Provisional figures suggest the engine will emit about 170g/km of carbon dioxide, which would put the car in the 19% tax bracket - including the 3% penalty for diesels, under the new company car tax regime . However, this is not as low as the 9-3 2.2 TiD, which emits 164g/km.
Early estimates suggest that on the European combined cycle, the new engine will return about 47mpg.
The 9-5's extra weight means that power is down slightly from the engine in the 9-3 (125bhp) with 120bhp being produced at 4,000rpm. But the new engine will keep Saab's reputation of producing torquey oil-burners alive by producing 207lb-ft at a low 1,500 rpm.
The saloon can make the 0–62mph dash in 11 seconds, while the estate comes in a fraction of a second later at 11.5 seconds.
A Saab spokesman said that the new model was expected to account for between 25% and 28% of 9-5 sales in the UK, with the majority of those cars being paid for with company cash.