The future looks bright for Fiat. Despite last year's talk of takeovers, doom and gloom, the Italian giant appears to be overcoming financial woes and political upheaval in Turin. The need for cash means generating showroom traffic and shifting some units. Unfortunately for Fiat, the volume sellers such as Brava and Stilo were seen as average and in today's ultra-competitive environment that jeopardises sales success and profit. A saviour was born in the form of the 2004 Car of the Year: the new Panda, to lead Fiat's revitalisation.

The Panda looks like a mini-MPV with its relatively short wheelbase and narrow track coupled with a tall body, but its diminutive dimensions ensconce a fairly roomy interior. It's not a tardis by any means, but the space is generous for two adults and their 2.4 children; with four adults being accommodated for short journeys with no problem. The only thing that is lacking is boot space: there is room for a week's shopping at a push, but luggage for a week's holiday is not going to fit in. The interior is well laid out and appointed but the quality of some of the plastics and switchgear are indicative of the budget price.

That's not to say that the Panda is a cheapskate. Equipment levels are generous with a CD player, one-touch electric windows, and a trip computer as standard. For £8,000 you can't really ask for more. One feature that does seem superfluous is the 'City' button for the electric power steering. Finger light in normal operation, the City button reduces effort to dodgem car levels and is almost disconcertingly light. We only used it for research purposes. In practice it's next to useless.

The driving position is good with the pedals, steering and seat sitting on a common axis (unlike the original). In any case the pedals are well positioned, although the foot well was a tad cramped for my size 10s, and lacked a footrest due to the limited space. The wheel, which features stereo controls etc, is good to hold and doesn't feature the spongy rim often found in cheaper cars. The real triumph is the positioning of the dash-mounted shift that allows gears to be selected quickly with minimum movement from the wheel.

The gearshift itself is very quick and accurate and matches the needs of the engine perfectly. Although it is more of a lugger than a revver (a different approach for Fiat), the little 1.2-litre needs to be worked fairly hard in conjunction with the well-judged ratios to deliver its best. This torquey nature of the engine feels odd in a little Fiat. You expect a zingy little screamer, but find a refined unit that prefers to do its work in the mid-range. Although the red line is set at 6,500rpm you won't go there often, indeed into a headwind we found it impossible to get there in third, with 4th offering more urge in that instance. Admittedly, most UK buyers will never trouble the top end of the rev range, but traditionally, small cars in Italy are driven with aplomb.

Straight-line performance is what you'd expect from 60bhp, but the 77lb.ft of torque does offset this lack of outright power nicely, and explains the mid-range performance. Where it does hurt however is at the pumps (we struggled to average more than 36mpg on our windy daily commute), at motorway speeds and particularly on quick A and B roads where overtaking becomes a juncture for a planning meeting. It's not that bad but expect to overtake a car at 50 plus mph and you need some room and/or a run up out of a corner. Which is where the chassis helps.

Body roll is pronounced, but once you adjust to it and concentrate on the driving the handling is tidy. The Panda is one of those rare cars that allow you to drive at the limit virtually all the time with no fear of retribution lurking in the chassis. You really can cane it everywhere, which probably explains our relatively disappointing fuel consumption achievement. The added bonus is that the deficiency in pure ponies means you don't live in fear of your license whilst having all this fun. An average jaunt down any given road in a hot hatch can be a fairly mundane experience on today's Gatso-equipped roads. In the Panda this is never the case. I would bet money that most people you see driving a Panda down a twisty road will be grinning or just plain laughing out loud.

Overall the Panda is a worthy winner of the Car of the Year award this year. It may not offer anything remarkable or radically new in the sector but it is a solid all-rounder with a broad breadth of talents and appeal. For years Fiat have made small cars that are fun to drive and live with and thankfully the new Panda sees a return to these ideals. It's a hoot. There's no doubting that the Panda will be a sales success, and deservedly so. It knocks the Cityrover into a cocked hat and stands in good stead next to the bottom of the range Skoda Fabia and Citroen C3. The challenge facing Fiat is to transfer the spirit of the Panda into its B and C sector offerings. We look forward to the prospect.