If Toyota is to be believed, you are looking at a small car about to cause a big fuss. Indeed if you went for all the hype that attended its launch in Milan last week, you’d be forgiven for thinking this was the most significant small car since the introduction of the Mini almost half a century ago.

The proposition of the Toyota iQ is as simple as it is enticing: a car that’s not much longer than a Smart (and shorter than the Mini) but is so cleverly packaged that it has proper seating for four people. It is, if you like, the ultimate city car, honed from bumper to bumper to help you through the urban jungle as efficiently as possible.

Unfortunately, small doesn’t equal cheap. It is not a credit-crunch car for those after the cheapest option. Indeed, with prices starting at £9,495 (for a car with an engine smaller than 1 litre), Toyota wants you to see the iQ as a premium product, which you must if it is to make any sense at all. After all, you can buy the same engine in the larger Toyota Aygo for £7,175, while both the Fiat 500 and Ford Ka ranges start at about £8,000. Toyota’s gamble is that the iQ’s generous equipment levels, unusual proportions and modern, iPod-generation design will tempt you to dig deeper.

Toyota is at least right about the interior space. The dashboard is designed asymmetrically so the front passenger can sit much further forward than the driver without comfort being sacrificed, creating rear legroom you would not believe looking at the car from the outside. Two six-footers can sit in tandem on the passenger’s side, though if the driver is similarly proportioned, heaven help the person behind – it’s strictly children only.

Extra space is also created through the design of unusually thin seats, though not even those can save the boot from being small. It struggles to accommodate much more than a briefcase. There is also a whole host of invisible innovations that helps Toyota make the most of the extraordinarily small space the iQ occupies, such as an ultra-compact air-conditioning system, a differential placed ahead of the engine to make the most of underbonnet space and a revolutionary (if small) flat fuel tank slung under the car.

The question of whether the iQ’s shape is chic enough for customers to fork out such a large amount of money for such a small amount of car is quickly answered on the test drive in Milan. Nobody loves small cars more than the Italians (more Smarts are sold in Rome than in any other city) and there’s no doubting the attention it commanded among the fashion-obsessed Milanese.

What it did less well was nip through the streets of Italy’s second city. It’s so short and has such an incredible turning circle that it’s probably almost as easy to park as the Smart, but it is still hamstrung by its width, unable to dive through gaps in the traffic because it’s barely a thumbnail narrower than a Toyota Yaris (and nearly 5in wider than a Smart). I spent some time following a bloke in a BMW X6 around the centre of Milan, and his hulking great SUV was no slower point to point than my diminutive city car.

Where it impresses more than you might think, given its job description, is out of town. Performance from the 996cc, three-cylinder engine is as pedestrian as you’d expect, but at least it sounds smooth and eager and will hold an 80mph cruise most of the time. What are more surprising are the impressive ride and minimal noise levels in the car. I’d expected it to be an angry little buzz-box on the motorway; in fact it’s a quiet, comfortable and pleasant long-distance companion.

It’s even quite fun to drive. The tyres are decidedly skinny but are fitted to a car weighing just 1940lb, so they can afford to be. It grips well, steers crisply and offers standard stability control in the unlikely event that you overdo it.

Toyota is making much of the iQ’s safety credentials, offering no fewer than nine airbags as standard, including a rear-window curtain bag, which is a record for such a small car. The concern remains, though, that in a car with no boot space to act as a crumple zone, that rear window airbag is little match for a rear-end impact from an HGV.

As for how much it will cost to run, fuel consumption is a competitive 65.7mpg and CO2 emissions just 99g/km, meaning your tax disc will be free. Toyota expects 40% of buyers to opt for the Multidrive version with a CVT automatic gearbox – even though it costs an extra £1,000, drags down fuel consumption to 60.1mpg, increases CO2 emissions to 110g/km, thereby incurring a £35 charge for the tax disc, and blunts still further the iQ’s modest performance. Having driven both versions through a large, snarled-up city, I’d go for the standard car with its sweet gearshift, light clutch and lower running costs.

The iQ comes to the UK in just two specs, iQ and iQ ing alloy wheels, air-conditioning and all the safety features, there seems little point in shelling out a further grand for the ritzier model when all it buys are items of dubious worth such as automatic lights and wipers and keyless entry and ignition.

It comes down to this: the iQ is not the revolution I’d hoped, but it is an innovative car that hits the market at a time when its size and fuel economy make it appealing. A Smart is a better town car, a Fiat 500 more stylish and a Ford Ka better to drive, but by offeringa fair slice of each of these attributes, the iQ comes across as the most complete car of them all. The problem with it is not one of capability, but one of price.

VITAL STATS

ENGINE 996cc, 3 cylinders

POWER 67bhp @ 6000rpm

TORQUE 67 lb ft @ 4000rpm

TRANSMISSION Five-speed manual

FUEL /CO2 65.7mpg / 99g/km

ACCELERATION 0-62mph: 14.7sec

TOP SPEED 93mph PRICE £9,495

TAX BAND A (free)

VERDICT Impressive but pricy

RELEASE DATE January 15

ALSO WORTH CONSIDERING...

Smart Fortwo Passion £8,700

For: Unrivalled urban weapon with cute looks and nippy performance
Against:Only seats two; harsh ride; clumsy gearbox

Fiat 500 1.2 Lounge £9,500

For:The small-car style icon of our time; good value for money
Against: Not much fun to drive; choppy ride; limited room in the rear