Toyota Motor Corp. is going for the jugular with its redesigned Prius, setting a 2.05 million yen starting price ($20,750) in Japan that is on par with the newly released Honda Insight.

Toyota notified Japanese dealers of the cutthroat pricing policy for its redesigned 1.8-liter gasoline-electric hybrid on March 25, dealers in Japan say.

Toyota has not yet officially announced pricing and declined to comment.

The move stokes a high-stakes price war between the Prius and the Honda Insight, which went on sale in the United States in March starting at $20,470, including delivery. The third-generation Prius goes on sale next month and had been expected to start around $24,000.

Aggressive U.S. Pricing Likely

Bringing the starting price down to Insight levels will steal Honda's thunder as purveyor of world's first affordable hybrid vehicle. Toyota's pricing strategy for the Prius in the United States is still unclear. But if Japan is any guide, it will be very aggressive.

In Japan, a bottom-rung Prius at 2.05 million yen ($20,750) would cost the same as a middle-trim Insight. Toyota might use the price to lure buyers and switch them to higher grades.

The best-trim Insight tops out at only 2.21 million yen ($22,370) in Japan. But a fully-loaded new generation Prius will stretch out to 3.27 million yen ($33,100), dealers say.

"It's great news for me, but the dealer margins are lower than ever," one dealer said.

The current generation Prius starts at 2.331 million yen ($23,590) in Japan.

A newer Prius that is also cheaper will be an easier sell against the archrival Insight. It is not only bigger and roomier than the Insight, it boasts much better mileage. The Insight has an EPA rating of 40 mpg city/43 highway, while the Prius gets 51 mpg city/48 highway.

Current Prius Stays On Sale

At the same time, Toyota will continue selling the current generation Prius in Japan alongside the new version, which is expected to hit showrooms here May 18.

Toyota will redesign the interior of the current Prius and knock down its price to 1.89 million yen ($19,130) to match the bottom-trim Insight, dealers say.

Rebadged as the Prius EX, it will target mainly fleet customers.