Called Efficient-C, it will be powered by a HDi common rail diesel engine delivering 90bhp and achieving Euro IV emissions standards.
It is expected to have a 0-62mph time of less than 13 seconds and a top speed of about 94mph. Other companies involved in the project are Ricardo UK and science and technology solutions provider QinetiQ.
A spokesman said: 'PSA Peugeot Citroen will provide its expertise in vehicle architecture. It will deliver the base vehicle hardware and engineering support to the integration of hybrid technologies, including powertrain, energy storage and associated control systems. The company will also provide guidance to ensure production and cost feasibility and consumer acceptability.'
The car is part of a project announced by the UK Government's Ultra Low Carbon Challenge, which invited proposals from individual companies to demonstrate the feasibility of a family-sized ultra-low carbon car.
The five winning proposals, which included the Efficient-C project, were announced by Transport Minister David Jamieson.
It is expected that the car will have been fully developed within the next 18 months and different aspects of its technology will be offered to customers in future products.