The new car will be priced well below the Model S, which starts at $69,900 and sells for $80,000 to $90,000. Tesla verified a report in auto publication, Auto Express, that the new car will be unveiled in 2016, will go on sale in 2017 and will look to take on BMW's 3 Series cars.
The Model 3 will the Palo Alto-based company's fourth car and will follow the Model X, which is a crossover between a sedan and a SUV, and will be big enough to seat 7 passengers.
The Model 3 will have a range of over 200 miles on a single charge and will be 20 percent smaller than the Model S.
In an interview with Auto Express, Elon Musk said that the name of the car stems from its legal problems with Ford, which threatened to sue Tesla over a trademark for "Model E."
"We had the model S for sedan and X for crossover SUV, then a friend asked what we were going to call the third car," Musk told us. "So I said we had the model S and X, we might as well have the E.
"We were going to call it model E for a while and then Ford sued us saying it wanted to use the Model E -- I thought this is crazy, Ford's trying to kill sex! So we'll have to think of another name.
"The new model is going to be called Model 3, we'll have three bars to represent it and it'll be S III X!"
Tesla vice president of engineering Chris Porritt said earlier this year that the new vehicle would not be based on the Model S' aluminum platform and will have an all new platform, rather than a cut up Model S platform. He also said that the company was relying on cheaper battery technologies to reduce overall costs of the car.