The decision guarantees the future of the factory at Ryton-on-Dunsmore, Coventry, and is likely to mean investment of around £150m over the next five years.
It is not known which new model the plant will produce, though because of the time-scale it is most likely to be the replacement for the successful Peugeot 205. Peugeot is also planning a replacement for its 405 model, which goes into production in France later this year. Ryton used to produce the 405 until 1992, and its reintroduction would not require substantial capital expenditure.
PSA Peugeot-Citroen, the parent company and Europe's third-biggest vehicle producer, is close to deciding whether to relaunch its vehicles in the US, from which it withdrew in the 1980s. The company also has expansion plans for Asia, where it has signed a deal with Proton to assemble Peugeots in Malaysia. Under PSA's worldwide expansion plans, executives in Paris have decided they need to utilise the spare capacity at Ryton, which produces the Peugeot 306 at a rate of 2,150 cars a week but could turn out 2,600.
A big extension of the plant is thought unlikely, as is a substantial increase in the workforce of 5,000, but Peugeot sources said the site had been earmarked for £150m investment.
The news, which Peugeot described as speculation, underlines confidence in the UK motor industry following Ford's planned £200m investment in Dagenham and BMW's expansion of Rover.
A decision on the new model is expected within months, and production should start within two years. It is a reward for the turnaround at the plant, which yesterday announced profits of £9.5m for 1994, against a £10.6m loss in 1993. Turnover rose by 5.8 per cent to a record £1.7bn. Production rose to 75,290 vehicles in 1994, up by 3.3 per cent, of which 26,881 were exported.
Richard Parham, Peugeot's managing director, said the company had made enormous strides in manufacturing efficiencies and cost controls.