Fiat Panda Twin Air

Price: from £10,750
Engine capacity: 875cc
Power output (PS @ rpm): 85 @ 5,500
Top speed (mph): 110
0-60 mph (seconds): 11.2
Fuel economy (mpg): 67.3
CO2 emissions (g/km): 99

Pandas are cute, so cute in fact that Fiat has sold 6.4 million in the past 30 years. And while the keepers at Edinburgh Zoo have been working hard to make sure their two new Chinese Pandas don't pile on the pounds, the designers at Fiat have added a little extra length, height and width to Europe's best-selling city car.

Panda fans – there are many of them and, yes, they name their cars – shouldn't worry, though. It's still the small city car with distinctive boxy looks they adore. The old car was a versatile but basic set of wheels but this model, only the third ever all-new Panda, has turned into something a little more accomplished, with higher levels of trim, comfort and most importantly a clever little engine. It's just a little pricier, too.

The standard 1.2-litre petrol will set you back £8,900 in the most basic trim, but for £2k more you get a lot more kit and a peach of a two-pot petrol engine. First seen on the dinky Fiat 500 in 2010 the Twin Air (Engine of the Year in 2011) works by using only two cylinders. And air flows into the engine not by the throttle valve but by a special set of inlet valves controlled by computer. Lost me? Well, essentially Fiat has downsized the engine and masterfully tuned the basic mechanics to offer some of the cleanest and greenest motoring in the world – coming well under the magic number of 100 grams of CO2 per km for tax-free motoring.

This doesn't mean dull performance, either. The Twin Air makes for fun in a pint-sized portion with bubbling acceleration and an odd but pleasing whirring noise. It is a joy to nip around town in and if you ignore the "eco" button and play with the revs, it will deliver a spluttering warble before giving way to a more aggressive rattle that begs for the dual carriageway out of town.

Unsurprisingly, this damages the fuel economy, but drive it carefully and follow the gear-change indicator on the dash and you'll do well. Be warned, though, you'll still struggle to hit the 67 mpg promised by Fiat. On my test run, the best I managed was 58 mpg, still a very good figure (take my word for it) and one that would improve as your car ran in.

Inside, the cabin is a perhaps little too garish for some – the black dashboard is too shiny and the headrests seem to be made from the hardest plastic known to man – but there's plenty of space (14 storage compartments) and it doesn't lack character. And with a smooth ride and a pleasingly swift gearbox there are few if any genuine practical complaints. When my test came to an end I had to climb back into a fuel-guzzling Land Rover (watch this space for more on that soon). I'd rather have had another dose of Panda fun.

It's made in Europe too, at an Italian factory that Fiat has spent €800m bringing up to scratch. Some might say this is unwise in a segment where margins rule and eastern European factories are throwing out city cars for less, but I'd be happy to help ease Italy's deficit with a shipment of these great little cars.

The competition:

The Panda's main rival is the new VW Up, which won the What Car? 2012 Car of the Year award recently for its fuel economy, top-notch build quality and tidy looks. The Hyundai i10 and Kia Picanto offer a budget choice but lack some of Fiat's refinement and ride quality. None is quite as cute.