TOKYO/MILAN (Dow Jones)--Mazda Motor Corp (7261.TO) and Fiat SpA (F.MI) will team up to make a small sports car in the first step of possibly broader partnership between the Japanese and Italian auto makers as the industry's biggest players continue to team up to share development costs and improve economies of scale.

The agreement--a non-binding memorandum of understanding announced early Wednesday--allows Mazda to try out a partnership with another big foreign manufacturer after a pact with Ford Motor Co. (F) fell apart last year.

For Fiat, the deal with Mazda it is latest move to bolster its presence in Asia--Mazda is the Italian group's third partner in the region---while giving it a new model to expand the line-up of its Alfa Romeo sports car brand which it plans to relaunch in the U.S. next year.

Fiat, which has a 58.5% stake in U.S. auto maker Chrysler Group LLC, is under pressure to find growth outside Europe where demand for mass-market cars has plummeted as growth has slumped amid the region's sovereign debt crisis. The Japanese yen's strength against major currencies is working against Japanese exporters like Mazda.

Though smaller in scale, the Fiat-Mazda tie-up follows a $750-million deal by Renault SA (RNO.FR) and Nissan Motor Co. (7201.TO) to takeover Russia's struggling auto group OAO AvtoVAZ (AVAZ.RS) May 3. General Motors Co. (GM) and PSA Peugeot Citroen (UG.FR) agreed a wide-ranging cost-saving alliance earlier this year to help reduce losses at their European operations.

The first Fiat-Mazda project will be a light-weight, two-seater sports car with a rear-wheel drive based on the platform of Mazda's MX-5 roadster. Each company will take charge of the body design and the engine for their respective versions of the new model. Production of the car is expected to start at Mazda's Hiroshima plant in 2015.

"It is a great way to relaunch the brand," IHS Global Insight analyst Pierluigi Bellini said, noting a roadster would broaden an expanding range of Alfa Romeo vehicles, including a sedan and sports utility vehicle, aimed at the U.S. market.

Mazda and Fiat have also agreed to look at cooperating in Europe. A partnership would focus on product development and manufacturing, said Wojciech Halarewicz, chief executive of Mazda's Italian operations. Mazda has a small presence in Europe with a market share of less than 2%.

In light of its experience with Ford, Mazda doesn't intend to extend its partnership with Fiat to a cross-shareholding, a Mazda spokeswoman said.

Fiat declined comment. The final agreement is to be signed in second half of the year.

Fiat is losing money in Europe and has become increasingly reliant on its market-leading position in Brazil and Chrysler whose sales have rebounded sharply in recent quarters as the U.S. auto market has recovered.

Mazda has lost money for the last four fiscal years, but is hopeful of making an annual profit in the 12 months through to March 2013 despite the continued strength of the yen against other currencies.

Societe Generale analyst Stephen Reitman said he was cautious to embrace this latest of alliances announced in the industry.

"These are easy to announce but the execution is always harder," he said, referring to the number of partnerships that have come to naught in the past.

Mazda shares closed in Tokyo before the official announcement was made. Early afternoon local press reports initially lifted the Japanese company's stock as much as 4.7%, but shares later gave up their up their gains and finished 0.9% higher at Y108. The benchmark Nikkei Stock Average closed down 2.0%.

In trading on the Milan stock exchange, Fiat shares opened lower in a downbeat trading session dominated by jitters over Greece's position in the euro zone ahead of a key meeting of European Union heads of state later Wednesday. By 1112 GMT, the shares were down 2.2%, while the FTSE Mib index in Milan was off 2.96%.