The Prius - which uses electric power and petrol - has been a hit in the US, where customers can wait months for delivery.
The technology could also be used in cars branded by Toyota's Chinese joint venture partner FAW, the firm said. Toyota has already taken steps to globalise its hybrid car technology by licensing it to the US's Ford Motor Co.
Parts for the cars to be built in Changchun, in north-eastern China, will be imported from Japan.
"With the new agreement, the companies intend to contribute to the promotion of hybrid vehicles in China as well as to the further development of the Chinese automobile industry," Toyota said in a statement.
FAW is China's biggest carmaker, and already works with Toyota to build both sedans and SUVs.