As a mark of confidence, an eye for a pun and a cheeky swipe at its Smart rival, Toyota naming its pint-sized new city car the IQ is a stroke of genius.

Billed as the world’s smallest four-seater, the Toyota IQ is targeting buyers who want style, driving fun, economy and a roomier alternative to the iconic Smart – all in a package of less than three metres.

It’s a car Toyota believes has the potential to become an icon and given the state of the global economy and the changing habits of car buyers it has a fighting chance of seizing the zeitgeist.

The Japanese manufacturer knows this isn’t the cheapest car on the market but its launch at an exclusive Milan hotel (previous guests Brad Pitt and Paris Hilton) a stone’s throw from the headquarters of fashion brands Diesel and Armani, betrays the fact its target buyers aren’t necessarily short of a bob or two – and aren’t necessarily relying on the IQ as their only means of transport.

Toyota believes it has produced a vehicle smaller than the standard city car, with better performance than a standard supermini and with the interior and exterior quality of a family hatchback.

The aim is not just to ape the Smart’s diminutive dimensions but also occupy the same classless ground already achieved with that Oscar night staple, the Toyota Prius.

Great-looking car

But where the Prius attracted criticism for its distinctive looks, Toyota’s newest model has won almost universal purrs of approval.

It looks playful and a lot more fun in the metal – to the point where you feel like grabbing it with a giant hand pushing it backwards sharply and watching it scuttle forwards.

Good-looking from every angle the Toyota IQ stands up well to comparisons with the Smart, being sportier-looking, fresher and more purposeful.

It will initially only be available in black or white, a restricted choice for a model which claims style as a key attribute and aims to steal customers from that re-invented Italian icon the Fiat 500 with its plethora of personalisation options. The range will expand throughout 2009.

In order to create that all important extra two seats Toyota has employed a package of space-saving innovations which include: thin but surprisingly comfortable front seats, shifting the gearbox and steering gear, relocating the fuel tank under the floor and re-shaping the air-con unit.

Impressive Ride

It may not seem the most exciting set of innovations, most of them hidden from view. But they have resulted in the world’s smallest four-seater (able to seat three adults and a child).

Space in the front is more than adequate and steering-wheel mounted stereo controls leave the stylish-looking central console devoted to aircon and, where specified, the satnav.

Mostly the interior delivers on the quality promise though we found that, while well-made, the “plum” coloured interior trim doesn’t really match high expectations.

Roomy door wells provide storage, the steering wheel and switchgear have a substantial quality feel and the smoothness of the ride (the IQ sits atop an all-new platform), well tested on Milan’s cobbled streets, add to the feeling of being in a bigger car.

There is no boot other than a slim space behind the rear seats for a jacket or two. However, the rear seats can be folded flat (together or split) to create 242 litres space.

The feeling of being in a better car is enhanced by impressive noise reduction while all-mod cons are supplied in the form of USB connectivity.

At launch the car will be available with a 1.0-litre petrol engine with buyers asked to pay a £1,000 premium for the automatic.

Great Economy

Already available in the Toyota Aygo the 68bhp engine can cover 0-62mph in 14.7 seconds (15.5 for the automatic) and has a top speed of 93mph.

In addition to acceleration, the manual also wins out when it comes to fuel economy (an average 65.7 compared with the automatic’s 60.1mpg) and fuel emissions (a road tax-free 99g/km compared to the automatic’s 110g/km)

And given the manual is much more satisfying to drive than the admittedly decent but thrashy Multidrive, it’s the one that gets our vote. A 1.3-litre engine will follow later in the year.

Congested, urban Milanese streets suited the nippy and agile nature of the IQ (its turning circle is actually smaller than that of the Smart) but the car was equally at home on the three-lane autostradas which took us into the Alps.

Despite its tiny dimensions the Toyota IQ is expected to receive the full five star rating following EuroNCAP testing thanks to its nine airbags and a raft of driver’s aids as standard including anti-lock brakes, electronic brakeforce distribution, brake assist, steering assist vehicle stability control and traction control.

Toyota hopes features like these will support what some see is a big price to pay for a very small car.

Loads of kit

UK Managing Director Miguel Fonseca admits the IQ “is not a budget or entry-level car” (like the Aygo). He says: “It’s not a cheap car with a long options list – it’s a complete package.”

And there is no doubt the kit which comes with the entry-level IQ is impressive. It includes: 15-inch alloy wheels, electric mirrors, privacy glass, six speaker CD/radio with steering wheel-mounted controls, aircon, trip computer, electric windows and leather steering wheel and gearknob trim.

IQ2 adds front fog lamps, bi-halogen headlights, automatic aircon, automatic wipers and lights as well as keyless entry and push-button start. Satnav and leather seats are the only options.

And once on the road the IQ is undoubtedly cheap to run.

Add that to the fact the car looks fresh, is great to drive and can ferry four at a push or three in relative comfort and you might be looking at one of the biggest small cars for 2009.