The Sedan, a larger four-door version of Peugeot's successful 306 model, will be launched at the British Motor Show next month but production in Coventry will not begin until the spring.
The Department of Trade and Industry is giving a pounds 1.2m grant towards investment costs.
Peugeot, one of Britain's most successful exporters, had been working well below capacity since recession hit the European motor industry. Its French parent company moved production of the 405 back to France last year, leaving Coventry to concentrate on 306s.
Geoffrey Whalen, deputy chairman of Peugeot Talbot, said the remaining pounds 30m of a pounds 150m five-year investment programme would be used to re-tool and improve facilities at the plant.
Until production begins in Coventry the Sedan will be imported from France. The model will be a competitor to vehicles such as Ford's Escort and Orion, a market that has seen little growth despite recent improvements in sales.
One analyst said the light car sector remained stagnant because of poor marketing and he was not predicting a big upswing in sales. Mr Whalen would not forecast Sedan sales but said total production at Coventry, which began in 1993 at 1,600 a week, would rise to 2,000 early next year. Output peaked in 1990 at about 2,240 a week.
He said there would be few jobs created as Peugeot had retained staff during the recession and maintained its two-shift system. He insisted that extra demand for components would create several hundred jobs among suppliers.
Mr Whalen said Peugeot would return to profit this year after last year's pounds 8.7m loss. Profits have collapsed since a 1989 peak of pounds 123m.Reuse content