France's Renault may partner Bajaj Auto Ltd on a proposed plan to make a $3,000 car, the Economic Times newspaper said on Friday.
The partnership could be part of "a larger alliance" between the two companies covering commercial vehicles, as well, it said.
Initial discussions have already begun and Bajaj Auto's managing director, Rajiv Bajaj, will meet Renault officials in Paris shortly, the paper said, citing unidentified sources.
Asked on Thursday if Bajaj Auto was in talks with foreign car makers for its small car project, Executive Director Sanjiv Bajaj had told Reuters "not to my knowledge".
Bajaj Auto, India's No 2 motorcycle maker, is developing a cargo carrier, its first four-wheeled vehicle, and has said it was studying the feasibility of making a small car.
Bajaj has said its car would not be as cheap as the one from Tata Motors Ltd, priced at just under $2,500 and scheduled for launch in 2008.
Carlos Ghosn, who heads both Renault and Nissan Motor Co, has said Indian joint venture partner Mahindra & Mahindra Ltd would be a "natural partner" if they were to develop a small car.
Mahindra, which makes the no-frills Logan sedan in India, has however, played down the mounting speculation that it would partner Renault on its small car project.