CEO Elon Musk said his San Carlos, Calif.-based electric carmaker has been working with Daimler since late 2007 to produce the vehicles for lease customers. Tesla will produce the battery pack and charger for the Smart electric car.

"If the 1,000-vehicle fleet is a success and the economics make sense and the product is compelling, that will expand to tens of thousands of vehicles per year," Musk told the Society of Automotive Analysts at a meeting coupled with the North American International Auto Show.

"Daimler is really looking at this as a very serious product," Musk said.

Daimler brought its Smart fortwo to the U.S. last year just in time for gas prices to peak, and it sold more than 24,000 of them. The eye-catching two-seaters are less than 9 feet long with a three-cylinder engine that gets the car 41 mpg on the highway.

The gas-powered fortwo has a starting price of $12,000. Musk didn't disclose how much the electric version would cost or how far it could go on a charge.

Daimler spokeswoman Julia Engelhardt confirmed the electric vehicle will be available in late 2009 but didn't provide any other details.

Tesla, which started in 2004, showed its $109,000 all-electric two-seat Roadster sports car at the Detroit show. Musk said the company hopes to unveil its five-passenger Model S luxury electric car in late February, with a price tag of $57,400.

Musk said the deal with Daimler was nonexclusive and Tesla was looking to establish more strategic relationships with other automakers.

"We believe in cooperative strategic partnerships and only doing a few of them," Musk said, rejecting reports of a "Silicon Valley versus Detroit" rivalry in the auto industry.

"Nothing can be further from the truth. We've actively sought to work with major car companies to supply them with electric powertrain technology," Musk said.