NEW YORK -(Dow Jones)- Toyota Motor Corp. has signed a deal with a Chinese car technology institute to develop technologies for environment-friendly car engines such as hybrid engines that operate on gasoline and electric power, Kyodo news service reported Tuesday, citing sources familiar with the deal.

Kyodo reported that by lending its engine technology to China, Toyota apparently hopes the project will give it an edge in the rapidly growing Chinese car market.

Sales of new cars are growing at a 50% annual clip in China, according to the news agency. One estimate puts the Chinese market at 7 million cars a year, the second largest in the world. The fast growth of car ownership in China has prompted concerns of the environmental impact of carbon dioxide and other exhaust fumes.

Kyodo, quoting sources familiar with the Toyota project, reported that the car maker concluded an agreement with the China Automobile Technology Research Institute, a Chinese government affiliate based in Tianjin. The deal was formalized July 31.

The joint research program involves demonstration tests and policy research on fuel-efficient technology and research of alternative energies for cars.

Specifically, Toyota plans to ship its Prius hybrid-engine cars for road tests in China. The two parties also plan to research the role of government in promoting the use of low-pollution cars, which are gaining popularity in Japan, the U.S. and elsewhere, according to Kyodo.

Last September, Toyota signed a deal to provide hybrid-engine technology to Nissan Motor Co. .

While fuel-cell vehicles, which are powered by electricity generated through the chemical reaction of hydrogen and oxygen and discharge only water as exhaust, are viewed as the most promising pollution-free vehicles, commercialization has been delayed, and this apparently prompted Toyota's competitors to focus on hybrid cars.

In addition to Honda Motor Co. and Suzuki Motor Corp. (G.SUZ), General Motors Corp. and Ford Motor Co. of the U.S. are also set to introduce their own hybrid cars.

Toyota apparently hopes that establishing hybrid-engine technology in China would help cement its leading position in the hybrid-car market, Kyodo reported.