Audi’s 2010 A3 luxury hatchback, the smallest car in Audi’s lineup, displays two of the company’s strongest attributes. First, innovations in electronic chassis controls and refinement make for quiet, smooth, high-performance luxury car behavior. Second, Audi’s developments in direct-injection and turbocharged engines and high-tech transmissions have pushed the boundaries of efficiency.

The A3 marries phenomenal efficiency, up to 30 mpg for gasoline-powered models and up to 42 mpg for diesel models on the EPA highway test cycle, with supreme driving dynamics and top-grade luxury.

This year, Audi has added a 2.0-liter Turbo Direct Injection (TDI) clean diesel model to the A3 compact wagon lineup; it replaces the 3.2-liter V6 gasoline model, and matches the V6’s torque at 236 lb/ft. The A3 lineup begins with a $27,270 front-drive model powered by a turbocharged and direct injected 2.0-liter four-cylinder that produces 200 hp. It is the only model available with a manual six-speed transmission. Optional is the quattro four-wheel drive system, which comes with an automatically shifting six-speed transmission. The benefit of the auto-shifting manual is that it is more efficient in power delivery and economy than a traditional automatic. It’s more fun to drive than a traditional automatic, too.

Although the A3 is Audi’s smallest car, it is not short on luxury. Standard equipment includes automatic climate control with a pollen filter and automatic venting so the car doesn’t get too warm while parked in the sun. A tilting and telescoping steering wheel with a range of movement that’s surprisingly wide, a remote entry system and even a back-saving power lumbar adjustment for the driver’s seat are standard on all A3s.

Dynamic safety systems such as stability and traction controls and brakeforce distribution are standard, as are front side airbags, Audi’s active front headrests and seatbelt pretensioners and force limiters. Rear-seat side bags are available, along with additional interior lights, a roof spoiler, seat heaters, heated washer nozzles and exterior mirrors and a navigation system with six-disc CD changer and double SD card slots.

Inside the A3, the seats are mounted low and give the feeling of a sportscar cockpit, and this position enhances headroom. The seats are sculpted and very supportive. In back, the rear seatbacks are split so skis will fit, and the rear doors open remarkably wide for easy entry and exit.

The A3 is quiet on the highway and has sportscar handling on back roads. The turbo engine is powerful even at low revs, and with a manual trans gets 30 mpg highway and 21 mpg city while the automatic takes advantage of its efficiency getting 22 mpg in city driving and 28 mpg on the highway. The A3 displays very refined throttle response in both gasoline and diesel versions; the gasoline engine will rev to 6,000 rpm without vibration or extraneous noises. A characteristic of the clean diesel engine is that it produces more power at lower revs, so it feels like a larger V6 engine.

The automatic transmission with manual shift paddles is a blast to drive with each shift so fast and smooth that drivers feel accomplished and hands are encouraged to stay on the wheel. The A3 feels like its larger siblings with its comfortable ride on the highway, and it’s nimble around town. The high-capacity disc brakes feel confident, and brakeforce assist reduces braking effort, but doesn’t surprise the driver with too much assist.

Historically, U.S. car buyers tend to identify hatchbacks with economy and have preferred compact sedans, but the A3 bucks that trend with its slick design and top-quality interior materials. Regardless of size, drivers may prefer the A3’s balance, quick throttle response and nimble handling to a larger car. Automotive writers always mention the high-quality feel of the A3’s controls and legibility of its instruments. The 2010 Audi A3 truly has the ability to reset perceptions of small cars.