The five-year programme has similarities to one set up in California two years ago to test fuel cells, which use hydrogen to create electricity, said Wolfgang Scheunemann, a DaimlerChrysler spokesman.

But the German project, part funded by the government and also involving fuel station company Aral, engineering company Linde and trucks and engineering firm MAN , may also test other fuels such as methanol and synthetic diesel.

"We need the community of auto producers if we want to get new engines and fuel cells in the market," said Scheunemann. "We need volume and scale otherwise the fuel companies will say 'why should we set up a whole network of fuel stations for your three cars?'"

He declined to give financial details for the project, which will be launched formally later this week.

DaimlerChrysler, seen by experts as a leader in fuel cells, will have invested $1 billion in the technology in the 14 years to 2004 and plans to produce small numbers of fuel cell powered buses from next year and cars by 2004.

But problems involved in the transport and storage of hydrogen and the lack of any infrastructure have raised doubts as to its viability.

Diesel engines, which emit up to 30 percent less carbon dioxide than petrol engines, have proved popular in Europe in recent years, although the fuel has high nitrogen oxide and particles emmissions.