By Matt Kimberley, PA motoring writer, drives Europe's first diesel-electric hybrid – the Peugeot 3008 Hybrid4.

Peugeot's 3008 has stolen a march on the competition by being fitted with the first diesel-electric hybrid powertrain to hit showrooms in Europe, marrying the benefits of short-term electric-only power with diesel torque and efficiency.

The system works in roughly the same way as the long-established Toyota version seen in several of its models. The 3008 Hybrid4, or HY4 for short, has a complete and fully-integrated hybrid system that never needs plugging in, and has no issues with potential range. Where this system differs from the existing 'full hybrid' systems is that the electric motor is much smaller – it puts out just 27 kilowatts compared to the Prius's 60-kilowatt system, and the motor drives the rear wheels leaving the front ones to the engine.

A smaller motor means less friction, which in turn means lower CO2 and big tax benefits. The base model puts out 99g/km of CO2, making it road tax and congestion charge exempt.

The mid-range and limited edition range-topping version emit 104g/km, which puts them in the lowest chargeable road tax band in this country, but significantly for Peugeot that's a crucial marker for 2000 euros in tax benefits in its home French market. Either way, it's a remarkable figure considering the car's relative size and weight – 140kg heavier than the diesel-only 3008.

Fuel economy is equally impressive. On the combined cycle the mid-range model officially returns 70.6mpg (slightly less than the base model), but it's in town where it really shines. I drove it on a low-speed urban route around short, narrow streets and it returned 71mpg in all the default driving settings. Astonishing, really.

Cars like this have been tuned to be driven a certain way – the 3008 needs constant gentle use of the controls to excel.

One of the key benefits of the HY4 system is the ability to choose one of four driving modes. The ZEV – Zero Emissions Vehicle – mode biases the car towards using the electric motor – great for in-town driving but not so good for inclines. The small motor struggles to pull the car uphill – on the upside the motors help recharge the battery on downhill stretches.

Sport mode uses the diesel engine almost all the time, giving the full 200bhp, 332ft.lb thrust. In this mode the 3008 HY4 is pretty good to drive, and although it shows quite a lot of body roll it suits the character of the car and allows it to ride very well. It's a surprisingly comfortable car.

The other two modes are 4x4 and Auto. While 4x4 hardly turns the 3008 into an off-roader, it does give valuable extra traction in sticky situations, like if you need to drive the car up .

Auto is the default setting and it takes care of almost everything. It's a low power mode designed to give maximum fuel economy, and reflects how most people will drive. It does need a consciously light right foot to help it do its best work, but 71mpg in town – or more – is the kind of reward owners can expect if they tow the eco-driving line.

The only thing Auto doesn't do is switch automatically to Sport mode. Even pushing the accelerator into the carpet doesn't, which means you have to select Sport manually if you want to overtake quickly. It's a bit clumsy, but it's a relatively small area of compromise.

One question on potential buyers' lips might be whether the system is refined or not. It is, and very much so as long as you work the pedals gently. The engine and motor cut in and out with no clues whatsoever beyond the helpful active diagram on the central screen. Get more insistent with the accelerator and the system becomes a little jerkier as it does its thing.

All in all, the 3008 HY4 is an excellent car, and good value compared to diesel-only rivals. It offers more performance, more prestige and much better fuel economy, especially in urban environments. It's a very convincing package that deserves to do well.