General Motors and DaimlerChrysler, two of the world's biggest automakers, will jointly produce new hybrid technology for their vehicles.
The team that will develop the new hybrid system will work in Michigan.
The companies hope to develop a new system that will make their cars faster and cleaner than their competitors.
Hybrids cars combines combustion engines and electric motors to save fuel and reduce pollution.
A variety of vehicles will be able to use the new "two mode" technology, which will boost acceleration by 25%.
Model clean up
GM plans to use this technology in its Chevrolet Tahoe and GMC Yukon 4x4s by late 2007.
Meanwhile, DaimlerChrysler's US arm, Chrysler, will introduce hybrid technology in its Dodge Durango sports utility vehicles (SUVs).
HOW A HYBRID SYSTEM WORKS
A hybrid car is powered by an electric motor
The motor's battery is recharged by an electric generator which is powered by a petrol engine
Since the petrol engine runs at an optimal speed, it consumes fuel in a more efficient way than traditional petrol engines
Additional power to the battery comes from kinetic energy from the wheels when the car is slowing down
The petrol engine provides extra power for the car when required
Mercedes-Benz, the German branch of the firm, will concentrate on high-tech hybrid systems in rear-wheel-drive luxury cars.
GM and Daimler have signed a "memorandum of understanding" and a final agreement is expected by early 2005.
No financial details of the deal have been revealed yet.
The first car-maker to use hybrid technology was Toyota in 1997, when it introduced its Prius sedan.
By 2005, other car-makers are introducing hybrid models in the US market, such as the Ford Escape SUV - which use Toyota's technology - and the Honda Accord sedan.
The Toyota Prius is currently the most popular hybrid car, and is even the vehicle of choice of Larry Page and Sergey Brin - the founders of internet search engine Google .
Concerns over the environment dangers of petrol and diesel-fuelled vehicles - such as global warming - and decreasing natural fuel supplies are causing an increasing demand for hybrid cars worldwide.