Now that the thought of a diesel engine under the bonnet of a Jaguar is no longer a big taboo, the company can get on with competing against its rivals on a level footing. The X-type diesel didn't make the BMW 3-series team lose sleep, but I suspect that more than just BMW took notice when Jaguar announced the all-new twin turbo diesel engine fitted to the S-type tested here.

The Ford-sourced 2-litre unit fitted to the X-type is a financially driven, but necessary evil. The engine in the S-type holds more promise. For starters, the layout is more interesting, being a V6 with a turbocharger per bank of cylinders. So far, only a 2.7-litre version has been released, though we hear that larger capacities are planned. Peak power is quoted as 206bhp at 4000rpm with peak torque, a healthy 320lb.ft at 1900rpm, backed up by 80% of the torque available from 1500rpm to 4000rpm. The raw figures compare well with the Mercedes E320 CDI and are not too far behind BMW's 530d (though way behind the incredible, but more expensive BMW 535d). Raw data means very little. To be a success, the S-type diesel needs to be refined, effortlessly quick and comfortable. The sales will come if Jaguar has got the basics right.

We tested the entry-level S-type diesel, which unfortunately is trimmed with nasty, out of date wood. The leather is lovely though and there is an air of quality in all the details. Switchgear is good and 90% there with tactility; only the indicator stalks could be a little stronger feeling. It all works very well and integrates a lot of technology and equipment without feeling like it: electric adjustment on seats, pedals and steering column and the satnav/audio/climate system with touch screen are a few examples. Many buyers not brought up in the digital age will find the touch screen more intuitive than BMW's I-drive system. We found it easy to get a perfect driving position, which always feels low-slung thanks to the high dashboard and shallow side windows.

This S-type is exceedingly comfortable, helped by its fantastic ride. Surprisingly, the car doesn't roll around in corners; it actually corners quite flat, but of course the set-up is certainly biased towards comfort. In extreme, the S-type corners in a neutral fashion, with rear slip possible in the dry and easy in the wet. Sadly, the oversteer is not so controllable as it is in a diesel BMW 5-series, as the automatic 'box is not often in the right gear for it, and it feels like it just wants to spin up a wheel rather than slide around. Depending on your needs, a manual may be a better option.

With the test car, after a good deal of experimentation, I decided that the fully automatic mode was the best option. I used the Sport mode only when going through a sequence of corners I know well and wanted to attack, or coming up to overtake someone. Even then, the strategy is not an aggressive one. Neither does the 'box always manage to slur the changes as well as the six-speed auto' fitted to the latest BMW, but almost. We didn't like the manual mode at all, as the movement of the lever is not positive enough for you to confidently feel which gear you are in. Better to just leave the car do the thinking for you and waft along in comfort. Indeed, the whole car encourages you to take it easy.

Saying that, the engine is a beaut and you generally are travelling 20mph quicker than you think you are... It is audible at times of course, but actually sounds quite good, better than BMW's 535d when on full chat, and is quieter in general; smooth too. There is a bigger delay off the line than in the BMW or the Mercedes-Benz E320 CDI, but its forte is the mid-range where anything over 2000rpm sucks the horizon closer. We only managed 27.5mpg in a week with the car, though I must admit to having no time on the motorway at all. Don't forget that the S-type is still a large, heavy car.

Considering its bulk, the S-type is surprisingly nimble and it never feels big when driving fast down a country road. Direct and communicative steering (better than in the S-type R version we tested) enhances the experience too. The brakes were a little soft feeling to start with, but with time felt perfectly modulated. They resist fade very well considering the car's weight and performance. Few owners will turn off the traction control, and we didn't either as it is so well judged, although you get an idea of the engine's torque when you notice the light flickering merrily when you briskly take off from standstill, even in the dry.

Externally, the S-type has matured, with a recent facelift adding sharper rear lights and a mild nip and tuck. Needless to say that its more modern replacement can't come soon enough. However, the S-type is actually a tasteful and discreet luxury car, and I would not be surprised to see sales remain stable until the end of its life. Certainly in diesel form, the car is competitive, and good value for money. There are no external signs that the car is a diesel, save for the rather large twin exhaust pipes, which are actually rather cool. Elsewhere, it is business as usual for Jaguar. Traditional buyers will not be disappointed.