UPDATE 1-Toyota dumps diesel engine project with Isuzu - Nikkei

July 7 (Reuters) - Toyota Motor Corp (7203.T) has decided to scrap plans to develop diesel engines with Isuzu Motors Ltd (7202.T) in what is likely to be the first of a series of restructuring measures under new management, the Nikkei business daily said.

Last year, Toyota had suspended the project to develop a 1.6-litre diesel engine with truck maker Isuzu due to uncertainty over vehicle demand. [ID:nT182190]

The two automakers had planned to start producing the engines, to be mounted on Toyota cars in Europe, in 2012.

By adding a 1.6-litre diesel engine car, the leading Japanese automaker hoped to bolster its market share in Europe from about 5 percent currently, the paper said.

But the company has decided to give up this idea and focus on selling hybrid vehicles there instead, Nikkei said.

With its German rivals, such as Volkswagen AG (VOWG.DE) and Daimler AG (DAIGn.DE), planning to launch hybrid vehicles, Toyota intends to export the Prius and other hybrids from Japan for the time being, the paper said.

Further down the road, the company will consider manufacturing hybrid versions of its passenger cars, such as the Auris subcompact, in Europe, Nikkei said.

In an effort to turn around its dismal earnings, Toyota's new management team, which took over at the end of June, has adopted a business strategy of tailoring production and marketing to more closely align with local demand trends, the paper said.

Toyota faces a second straight year of losses in the financial year to March 2010, reeling from a sharp sales slide in all major developed markets. (Reporting by Anand Basu in Bangalore; Editing by Himani Sarkar)