A Jaguar source told Auto Express: “Look at the 2.2-litre diesel and look at engines like the new 2.0-litre turbo [petrol] and you can see we've got the powertrain platform already for a smaller car.”
The newcomer - which would sit below the XF in the line-up - will be front engined and be offered with a choice of rear and four-wheel drive, just like the recently launched XF and XJ AWD models.
In addition to saloon and Sportbrake estate bodystyles, this model could also spawn a road-based SUV to further boost sales.
Jaguar bosses have also confirmed development of a nine-speed automatic gearbox, but that it won't make it to any models until around 2014. The brand also suggested that it would not consider adding any more ratios once the nine-speed 'box is released.