The Peugeot 207i will hit the market at the beginning of the next Iranian year which starts on March 21.
"We decided to produce the 207i for its low fuel consumption because, with the implementation of (a decision to withdraw) targeted subsidies, such cars will be in demand," Industry and Mines Minister Ali Akbar Mehrabian told reporters.
Over the next five years Iran intends to steadily scrap subsidies on energy products, which would make fuel items like petrol costlier.
The country's petrol imports could also be targeted by Western countries as they consider levying new sanctions on Iran for its defiant nuclear programme.
Iran, despite being OPEC's second-largest oil exporter, depends heavily on fuel imports as it lacks sufficient refining capacity.
Mehrabian said the new car will have 60 percent of its parts locally produced.
"We plan to increase this to 90 percent by next year," he said.
Pierre Foret, representative of Peugeot in Iran, said the launch of the 207i was the French car maker's attempt to "develop its market in Iran."
Iran Khodro, the largest car manufacturer in the Middle East, plans to hike its production to 730,000 vehicles by next year from around 680,000 in the current year.
