Under the terms of the deal, which was signed on Wednesday at Saab headquarters in Trollhättan in western Sweden, BMW will supply Saab with 4-cylinder 1.6 liter turbocharged gasoline engines, to be placed in next-generation Saab vehicles.

“BMW’s engines and their fuel savings innovations are widely regarded as a benchmark in the premium segment,” Saab Automobile CEO Jan Åke Jonsson said in a statement.

“We look forward to integrating this technology into our next-generation vehicles in a true Saab way.”

The sales and marketing director at BMW Ian Roberston said: “We are delighted to support Saab with our engine expertise.

“Our engines have a clear lead over the competition when it comes to fuel

consumption, emissions and performance.”

Victor Muller, head of Dutch automaker Spyker Cars, which rescued Saab from bankruptcy earlier this year, hailed the deal as a “major step” in putting Saab back on the road toward profitability.

He also left the door open for deepening Saab’s relationship with BMW.

“Both parties are open to explore further opportunities as part of this relationship in the future,” Muller said in a statement.

Spyker was a small specialist luxury sportscar maker before it bought Saab for close to $400 million dollars from US group General Motors when GM was in severe trouble during the financial crisis. It intends to re-launch the Saab brand.

Spyker, which has never made a profit since being set up in 2000, said in August that Saab had sold 10,500 cars in the first half of 2010, down from 24,300 in the same period in 2009.

Saab is associated with high-range cars and Spyker has set sales targets of 45,000 cars for 2010, moving up to 80,000 units next year, with plans calling for Saab to turn a profit in 2012 with output of 120,000 cars.

GM owned Saab for 20 years but the Swedish company never made a profit during that period. In 2009, output plunged to 38,756 vehicles from 93,000 in 2008.