A spokesman at Illinois-based Caterpillar, the world's largest construction equipment maker, said that Perkins does have a supplier relationship with Mitsubishi Heavy Industries, but added: "It is our policy not to discuss specific details about agreements with any suppliers."

Mitsubishi Heavy Industries officials in New York declined to comment on the report.

Armed with the OEM deal, Mitsubishi - Japan's largest heavy machinery maker-plans to boost output by five times to 50,000 engines per year by fiscal 2004/05, the newspaper's Tuesday online edition said.

The firm is reportedly spending about 1.7 billion yen ($14.1 million) to increase the capacity of its Sagamihara plant in Kanagawa, west of Tokyo.

Perkins hopes the OEM arrangement will reduce its heavy initial investment costs, the newspaper said.

Rivals like Komatsu Ltd. , Japan's largest maker of construction equipment, also hope to eclipse rivals in selling eco-friendly engines to other construction machinery makers, the Nihon Keizai said.

Isuzu Motors Ltd. has also begun working with Hitachi Construction Machinery Co. on development of the eco-engines, which it expects to cost the automaker 7 percent more than engines that meet current regulations, the report said.