OFTEN credited with being the first car to bring proper luxury to the mass-market hatchback sector when it appeared in the mid-nineties the Audi A3 has a certain reputation to uphold.

Its subsequent success has seen German rivals Mercedes and BMW as well as Toyota's premium brand, Lexus, among others launching upmarket hatchbacks of their own, so the competition is certainly hotting up.

The latest A3 is ready to meet the challenge, though, with a brand new line-up of engines, a classy interior and oodles of kit.

Of course, the main problem with luxury cars for most of us is the premium price tag that they command.

So, if we do shell out for one it's nice if we can recoup some of that outlay with savings in running costs.

Audi realised this and all the engines offered in the third generation A3 offer significant improvements in fuel economy.

Of particular interest to cash-strapped households and fleet managers alike though, will be the 1.6-litre diesel that powered this car.

Coupled with an automatic start/stop system, standard across the range, and a slick six-speed manual transmission it offers almost 75 miles per gallon on average while carbon emissions of just 99g/km mean that you won't be paying any road tax for the privilege of driving it around.

Running costs will, therefore, be far from premium rate.

It's also pretty torquey, providing plenty of pull across a wide rev band, and doesn't compromise too much on performance - with a 0-62mph time of 10.7 seconds on the way to a top speed of 121mph meaning it's not a slouch.

Cruising at motorway speeds is effortless, comfortable and refined with little evidence of engine, road or wind noise.

Driving in town is handled with equal aplomb while the power steering offers just the right amount of feedback to make country lanes engaging and fun, allowing the driver to take advantage of the impressive grip and nimble handling.

The lowered suspension on this mid-range sport trim car did mean a firmer ride than some might like, but if that's not to your taste you can specify the more forgiving set-up from the entry level SE at no extra cost.

Economy and stability are also helped by the fact that the new A3 is lighter than its predecessor and has a longer wheelbase, but the overall dimensions are largely unchanged.

Other design tweaks are minimal with Audi sticking to a mantra of evolution rather than revolution appearance-wise, so the A3 remains an understated hatchback to look at.

All the familiar Audi characteristics are there and it's clean, sharp lines are certainly far from ugly but you're not going to stand out from the crowd either.

Inside the cabin still has the trademark quality that underpinned the original A3's positive impact. Top notch materials are abundant and the fit and finish is faultless.

Head and leg room is good all round although shoulder room will be tight with three in the back and the intrusive transmission tunnel leaves little foot space for the person in the middle.

The boot is a good size though with the 60/40 split folding rear bench adding extra load-carrying versatility. There's also an adjustable floor which can be raised to eliminate the troublesome lip when loading heavier items.

Storage in the cabin is also pretty good with plenty of cubbies scattered around to ensure you've go somewhere to stash your mobile phone, keys, snacks, drinks bottles, etc. A neat integral compartment in the rear seat also conceals a high-vis vest, a legal requirement when driving in much of mainland Europe.

You also get a lot of kit for your money with alloy wheels, air conditioning or climate control, and a stereo with multimedia interface and a neat screen which pops up out of the dashboard included as standard on all models with USB/iPod and Bluetooth connection too.

Stepping up to sport spec adds Audi's drive select adaptive dynamics system - enabling the driver to choose from five modes which dictate the car's driving characteristics - as well as sports seats, sports steering wheel and distinctive aluminium detailing inside and out.

Stability control and front, side and curtain airbags are also standard across the range and helped the A3 to the top five-star rating in the Euro-NCAP crash tests so safety won't be an issue.

And if the basic car still isn't posh enough for you options include satnav, heated seats, a premium brand stereo and all manner of high-tech advanced driver aids if your wallet will stand it.