The 178bhp 2.4-litre turbodiesel is a version of the D5 engine already available with the S60, V70, XC70 and XC90.
It is available in the S40 saloon and the V50 Sportswagon in Sport, SE and SE Sport trim levels. Prices start from £23,205.
The engine has a top speed of 140mph and powers from 0-60mph in 7.9 seconds. It will initially be available with Geartronic transmission as standard, which is the first time Volvo has offered the combination of diesel power and automatic transmission for the S40 and V50 models. A six-speed manual transmission is due to be available in mid-2007.