The new model, which would be priced at around 20,000 euros (USD 21,800) and be presented in 2027, would offer "entry-level electric mobility from Europe for Europe", VW CEO Oliver Blume said in a statement.
Volkswagen also detailed plans for a range of new battery-powered cars for under 25,000 euros to be unveiled as soon as the end of 2025.
These included two compact cars from its VW and Cupra brands, as well as two small SUVs, one each from VW and Skoda. All four vehicles would be produced in Spain, Volkswagen said.
The German group -- which numbers 12 brands in total -- has ploughed huge sums into producing more electric vehicles.
But Volkswagen is making slow progress on electric vehicles amid weak demand and increasing competition from abroad, especially from homegrown carmakers in its biggest market China.
Cheaper Chinese models are not just a concern for Europe's biggest auto manufacturer, but for European officials.
Brussels last year angered Beijing after launching an anti-subsidy investigation into Chinese electric cars that would represent unfair competition to domestic European manufacturers.
Volkswagen's plans for a cheap compact model, of the kind generally preferred by European consumers, was a "clear commitment to Europe as an industrial location, a European industrial policy and ultimately act in the interests of European customers", Blume said in the statement.
For the new model, Volkswagen would "rely on a high degree of localisation in Europe, which in turn benefits Europe as an industrial location", the group said.
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