The Panda is a shining example of what Fiat Auto knows best: design and build great small cars. Given the company’s precarious financial health, is this car - however worthy of the adulation - capable of pulling its maker out of the messy quagmire? While it alone will not help, the Panda could herald a resurgence for Fiat, says OVERDRIVE’s European correspondent Ray Hutton after driving the 1.2-litre Panda.

The Fiat Panda was elected the European Car of the Year 2004. Because I preside over the international jury that elected it, I would like to say that winning the Car of the Year guarantees that the Panda will be a success. It doesn't. Fiats have won several times before, and some of them have gone on to be best-sellers (127, Uno) while others (Tipo, Bravo/Brava) hardly made a mark on the sales charts in Europe. Meanwhile, Fiat Auto, the company, got into financial trouble from which it has yet to emerge.

The new Panda will not in itself revive Fiat - it is made in Poland, not Italy, and it is at the cheap end of the market where profits are low. But it would seem to herald a brighter future, with Fiat concentrating on what it has always done best: making useful small cars that are easy to own and fun to drive. And over the last six months it has seemed to do well for its maker in most European markets.

It also claims high standards of safety. Two airbags are fitted as a matter of course. The cheapest version started out without anti­lock braking (ABS) but that became compulsory in Europe for new cars from big manufacturers from this summer. Among its competitors, only the latest Daihatsu Charade is close to matching the Panda's specification and equipment and that is a smaller car with a three-cylinder engine which costs £6,495 in five-door form.

Elsewhere, the Panda offers the choice of 1.1- and 1.2-Iitre petrol engines and the most advanced small diesel in the business - the 1.3-Iitre 16-valve MuItijet, already available in the Punto supermini and the Opel Corsa. The diesel-engined Panda, only now becoming available, is actually the top model of the range but it could be too expensive to make sense in a car like this. Small cars are already pretty economical so the fuel consumption improvement provided by the diesel is less significant than in a bigger model.

I concentrated on the 1.2-litre Panda Dynamic - the type that is the biggest seller in Britain. There are actually four Dynamic versions which feature either air conditioning, a large, electrically-operated glass sunroof, or a superior sound system with steering wheel controls. All are less than £7,500. Additionally, the Panda is the first car in its price class to include on its options list: traction control, ESP electronic stability control, a 'hill holder' system, park-distance sensors, and six airbags.

The 60bhp 1.2-litre petrol engine is an old design of no great technical merit but in this car it is quieter and smoother than in previous applications. It's not fast, of course, but it is lively enough for town and normal suburban roads and on the motorway it keeps up with the traffic gaggle on all but the steepest inclines. Fuel consumption averages around 50 miles per gallon.

I have driven several Pandas in Italy and in Britain but it was two 100-mile journeys here that confirmed to me the 'big car' qualities that set it apart from others of its size and price. Noise levels were low, thanks in part to a fully-trimmed cabin - no great areas of painted metal inside like the rustic old Panda. The seats, high like a mini-MPV, were comfortable and the driving experience really quite rewarding. The gear-lever is positioned conveniently close to the small steering wheel, high up on a massive centre console that extends from the dashboard. The suspension is quite supple so that the body rolls when cornering, more than most modern cars and, on its skinny tyres the Panda may not have terrific roadholding but it does handle nicely. The steering is responsive and doesn't require much effort. The brakes are similarly reassuring. In summary, this is an honest and surprisingly refined small car.

It's practical too. The luggage area isn't generous but in all but the cheapest versions, the rear seats can slide forward to enlarge it (at the expense of rear seat knee room). But motoring families should note that the rear seat backs fold down with a 50:50 split and therefore provide only two positions with seat belts.

This five-door Panda is the beginning of a series. Two different four-wheel drive variants are coming soon - one with the standard body and the other dressed up as an SUV. Next year there will be a three-door version which will replace the altogether less accomplished Seicento and there is a plan, not yet finally approved, to use the Panda platform to make an inexpensive retro model that resembles the much-loved Fiat 500 of the 1960s. The smallest-ever Euro Car of the Year could be the start of something big.