Despite fierce debates between hybrid fans and diesel engine advocates, the two fuel-saving technologies are not mutually exclusive. In fact, the combination of a fuel-efficient diesel engine and a gas-electric drivetrain could push fuel-efficiency up and beyond 60 mpg. Volkswagen and Peugeot have shown concept diesel-hybrids for years, but have failed to commit because doubling up on the technologies means doubling up on the cost.

That is finally changing according to a new report from Nikkei business daily: Peugeot Citroen has signed an agreement with Sanyo Electric to provide nickel-metal hydride batteries for the French carmaker’s diesel electric hybrid cars.

According to Nikkei, the first two diesel hybrids— the Peugeot 3008 sports utility vehicle and the luxury Citroen DS5—are targeted for 2011. In May, Peugeot-Citroen announced development of the HYbrid4 diesel-hybrid propulsion system. The system will add about $3,000 to the car’s list price, while granting a fuel economy improvement of approximately 35 percent. The news about Sanyo supplying the batteries shows a new level of commitment to the project.

Sanyo plans to ship batteries for tens of thousands of cars per year, Nikkei said. Sanyo currently supplies nickel-metal hydride batteries for the Honda Insight, Ford’s hybrids, and a future Volkswagen hybrid.

Meanwhile, Reuters reported that Panasonic’s bid for Sanyo will likely be approved by the US and Chinese government. Panasonic EV Energy Co., a joint venture with Toyota for hybrid vehicle batteries, will reduce its stake in the company from 40 percent to 20 percent—to earn government approval by avoiding the creation of a monopoly for hybrid batteries. Nonetheless, Reuters said the deal would create “a powerhouse in the fast-growing market for batteries for hybrid cars.”

High costs will mean low production numbers for the Peugeot 3008 and Citroen DS5 diesel hybrids. The likelihood of those vehicles coming to the US is low. But the introduction of the first diesel-hybrids is a start, which could lead to more diesel-hybrids—especially in Europe. It could also mean the beginning of a détente between hybrid and diesel camps.