Mercedes-Benz's new A-Class is a smart choice for down-sizers says, motoring editor Andy Russell.

When Mercedes-Benz launched the original A-Class in 1998 it was seen by manys a stepping stone into the prestige German brand for upwardly-mobile motorists.

The clever design saw this compact, chunky hatchback having a surprising amount of space but it was functional rather than fancy although for many owners the three-pointed Mercedes star was more important than its looks.

Fifteen years later and the car market has been turned on its head with motorists looking to down-size and cut their running costs rather than being upwardly mobile.

As a result there's more competition and rivalry with prestige car-makers putting more store in smaller models such as the Audi A1 and A3, BMW 1 Series and increasingly upmarket Volkswagen Golf.

In such quality company the old A-Class would struggle but Mercedes has risen to the challenge with the third-generation model which is a real looker.

It's lower and sleeker and adopts the latest face and styling of the sportier Mercedes-Benz range which has done wonders for its visual appeal, taking it from dumpy to dynamic, which is going to help it appeal to a much younger market.

A good range of engines backs up the promise of the looks with 122hp and 156hp 1.6-litre petrol engines in A180 and A200 and 211hp 2.0-litre in A250. On the diesel front there's 109hp 1.5-litre in A180 CDI manual and 109hp 1.8-litre in A180 CDI automatic, 136hp 1.8-litre in A200 CDI and 170hp 2.1-litre in A220 CDI.

If you do reasonable mileage, the diesels make sense and the new seven-speed automatic gearbox, with eco, sport and manual modes and flappy paddles behind the wheel, makes them more appealing with lower emissions and fuel consumption without denting performance.

I drove the A200 CDI which makes up for its lack of top-end power with strong, flexible low-down performance. Wind it up and it gets vocal but let the auto box go about it business changing up at low revs for acceptable, rather than brisk performance, and it's very civilised with real-world fuel consumption between 55mpg running around and 70mpg on a gentle poodle.

It's a similar story with the way the A-Class drives. In everyday motoring the A-Class is pleasant rather than exciting – a little at odds with its dynamic design – but press on along country roads and body rolls build with speed through corners although the A-Class feels secure with good grip. In contrast the ride improves with speed – more supple and settled – but there is tyre noise on rough roads. SE and Sport models have 'comfort' suspension but my test car had 15mm lower sports suspension as part of the £242 dynamic handling package with selective damping but it felt over firm and fidgety travelling slowly.

The interior is a soothing place with a smart look and finish, quality trim and a sensible, interesting dashboard design with controls and dials that are clear and easy to use. Many functions are operated via a central controller between the front seats but it is a shame the large screen perched on the dashboard looks like an afterthought compared to the new Audi A3's slimline screen which slides in and out of a slot on the fascia. The driving position has plenty of adjustment and with an electronic parking brake on the fascia and automatic gear lever on the steering column the centre console feels uncluttered.

The A-Class will seat four adults in comfort, five at a push with sufficient leg and headroom in the back but small rear side windows and screen and chunky rear pillars make it feel smaller than it really is and limit visibility – fortunately my test car had a £300 optional reversing camera and £770 option of lane-keeping and blindspot assist – the latter proving invaluable more than once on busy dual-carriageways.

The 341-litre boot is reasonable for a compact hatchback and well-shaped with a low load lip so even though access is restricted at its narrowest point it is accommodating with careful packing. With the 60/40 rear seat backs down it grows to 1,157 litres.

The days are long gone when Mercedes models' equipment was meagre. All models get seven airbags, attention assist to warn a driver is getting tired and a radar-controlled low-speed collision-prevention system and SE, Sport, AMG Sport and Engineered by AMG feature attractive equipment levels in keeping with the prestige badge. Apple was involved in the A-Class development so is geared up for iPods, iPhones and iPads.

The smart new A-Class will look great on your drive even if it is not so great to drive as some of its peremium rivals. That said, it has the right image and right badge and is a big step forward over it predecessors.