MG Rover, the struggling British carmaker, has reached agreement with its Chinese partner, Shanghai Auto, to design and build a range of new models based on a medium-sized and a small car.

Rob Oldaker, product development director, said yesterday the two joint venture partners expect to get Chinese government clearance for the deal, which is much larger than anticipated, this year.

But he admitted that the launch of the long-awaited medium car has slipped until 2006 and the group's UK market share has sunk to 2.5%. Rover, which sold 144,000 cars globally last year, will be hard-pressed to sell more than 100,000 in 2004.

The carmaker, bought by Phoenix, a Birmingham-based consortium, for £10 from BMW in May 2000, has been kept alive by a £500m cash dowry from its former owners and by revamps of older models.

The group, which employs 6,000 people in the West Midlands, including 5,000 at its car and engine-production plants at Longbridge, has also raised cash by selling its parts and components business to US partner, Caterpillar, and large chunks of Longbridge for development. It is likely that Shanghai Auto has injected capital into the ailing British group under the deal.

Loss-making Rover has been banking on the new medium car to ensure its survival, including a return to profitability, but a deal with its previous Chinese partner, Brilliance, collapsed and TRW, its design and engineering partner, then went into administration.

But Mr Oldaker said Rover and state-owned Shanghai Auto, China's third-largest car-maker, had agreed on their forward product plan, which will see different models built in Longbridge and China. The deal lasts until 2010 and can be extended.

Rover, which has sold just 6,000 of its small City car built for it by India's Tata, has been desperate to find the capital to develop a new small car alongside the medium range on which design work first began in 2001 and the Chinese are providing this. Rover has effectively scrapped its earlier design to accommodate the Chinese, with more than 400 engineers working on the project.

"You can't spirit a new car up out of the blue," Mr Oldaker said, expressing the hope that the Chinese deal would help restore confidence to Rover's workforce and dealers.