AS significant as it is in its own right, the second generation Audi A3 that goes on sale in Australia this week also signals the first round of gunfire in a full-on three-cornered fight in the emerging luxury compact car class between Germany’s finest.

Soon to go head-to-head with the Audi is the second generation Mercedes-Benz A-class, due on sale here in early 2005. But before that comes the BMW 1 Series, a rear-wheel drive small car that will undoubtedly become the A3’s closest rival, surpassing BMW’s own 3 Series Compact.

So conscious is Audi of the onrushing BMW that even as this was written post the media launch the final pricing was still being crunched for the A3, the Australian division intent on hacking as close to the bone as possible and therefore denying its deadly rivals as much leverage as it can.

All Audi would say is that it hoped to have pricing that would at least match the old car and perhaps even undercut it. That means $35,400 or better, as that was the price of the old 1.6-litre five-door, which became the base model when the three-door models left the market in October 1999 (except for the S3 hot hatch).

It’s interesting to note that pricing is well under the original three-door launched back in 1997, that car debuting for $36,950. No doubt about the value improvement.

This time round Audi swears the three-door is here to stay for the entire model run. Its aim is to emphasise the coupe-like sportiness of this model, with the recently revealed five-door Sportback (as Audi has christened it) getting more of a load-lugger role when it is launched in February 2005.

Undoubtedly assisting that plan is the increased differentiation in styling of three and five-door A3. It also must be pointed out that both 1 Series and A-class are five-doors and therefore the Sportback will align more closely with them.

Speaking of the look, there’s no doubt it’s evolutionary in tone, chiseling away at the rounded rises and falls of the old car. It appears more purposeful, an effect no doubt aided by the 48mm increase in length, 65mm longer wheelbase, 30mm increase in width and 10mm lower roof height.

Yet the familiar look hides plenty that is all-new underneath, like the platform sourced from the latest Volkswagen Golf V (the old car was based on Golf IV), as well as a group of new engines and transmissions.

What we are concentrating on here are the aforementioned 1.6 and its closest siblings the 2.0-litre petrol and a 2.0-litre turbo-diesel four-cylinder versions, which are on-sale now. The 3.2-litre V6 quattro, which offers stronger performance than the old S3, arrives in August and we’ll bring you a drive report on that model then.

The 1.6 is one part of the transverse front-wheel drive layout that is familiar, being the Volkswagen Group single camshaft, two-valve per cylinder unit carried over from the old A3 range. Producing 75kW at 5600rpm and 148Nm at 3800rpm, it is mated to a five-speed manual gearbox as standard or a new-to-the-class six-speed tiptronic automatic first seen in the TT sportster last year.

The 2.0-litre petrol engine replaces the 1.8 in the lineup and is an FSI unit, the first of its type sold by Audi in Australia. FSI stands for fuel stratified injection, VW Group’s title for direct fuel injection, which means the petrol is fired into the cylinder downstream of the inlet valve, rather than above it. This has lots of positive befits for the efficiency of the combustion process which in turn means better performance and better fuel economy.

In Australia, the performance is diluted by our premium unleaded having a relatively high sulphur content (150 parts per million versus 50 ppm in Europe), but the 2.0 still produces 110kW at 6000rpm and 200Nm at 3500rpm. This engine will also run on lower octane fuel, with a performance penalty.

Transmission combinations are either six-speed manual or the new six-speed tiptronic.

While the FSI is a first, it’s certainly over-shadowed by Audi’s decision to include the turbo-diesel in the range, mate it to the new DSG twin-clutch six-speed sequential manual gearbox and market the car as a warm hatch - a far cry from the image traditionally associated with oil burners.

While the double overhead cam 16-valve direct injection engine’s 103kW at 4000rpm won’t have sports fans leaping for joy, they’ll certainly pay attention to the 320Nm available between 1750-2500rpm. And those of us with a hip pocket twinge will appreciate the claimed 5.7L/100km fuel consumption average, which easily surpasses both 2.0 and 1.6 petrol engines.

Acceleration figures to 100km/h from rest also outdo the 1,6 and are around the mark of the petrol engine at around 0.5 sec under 10 seconds.

Those drivetrain combinations are supported by an updated MacPherson strut front suspension design and an all-new four-link rear-end which replaces the old torsion beam set-up, new electro-mechanical speed-sensitive power steering and a disc braking system which incorporates the latest generation ESP stability control including ABS, Electronic Differential Lock (EDL), Anti Slip Regulation (ASR) and Brake Assist.

The A3 range comes in two trim and specification variations - Attraction and Ambition. The 1.6 only comes in the former, the FSI in both and the TDI and V6 in the latter.

Both have front, side and curtain airbags and active headrests as standard safety features along with lap-sash belts for all five passengers. Flexibility is aided by easy-entry front seats, split-fold rear seats and a claimed 55mm increase in interior space. No improvement in the already adequate luggage space over the old three-door however, that stays at 350 litres with rear seats up, 1100 with them down.

Comfort features for both versions include power windows, drivers’ seat height adjustment, remote central locking, dual climate control and single CD players. The two trims are differentiated by different leather steering wheels, cloth interiors, trim finishes and exterior paint choices.

Ambition also adds sports suspension, foglights a trip computer, sports front seats including passenger’s seat height adjustment, aluminium door sills and rear sunblind. Both cars get alloy wheels, but the Attraction is on 16-inches mated to 205/55 rubber while the Ambition gets lower profile 225/45s on 17-inch wheels.

What’s also noticeable for these cars is a long and expensive options list. No standard cruise control (adds $750), no standard leather (add $3200) and no standard metallic paint (add $1300). There’s much more besides, guaranteeing that for many A3 buyers the recommended retail price will simply be a starting point.

Audi is hoping to sell 500 A3s this year and 1000 in 2005, when the five-door is in the mix as well. The big seller is forecast to be the 2.0 FSI with 60 per cent of sales, 20 per cent going to the 1.6 and 10 per cent split between the diesel and the V6.

The interesting thing about that full year forecast is that back in 1997 when the original car was launched here the (different) distributor forecast 1200 sales in the first full 12 months. The fact is the best A3 figures ever obtained in Australia were 814 sales in 2002, when the old three-door had long departed the Aussie market.

It all adds up to a tough sales ask for the new A3, even before you to take into account the arrival of the 1 Series and A-class.