Chrysler's new Envi unit, which was created last September, is developing vehicles that are intended to run on battery power alone for about 40 miles, Chrysler spokesman Nick Cappa said.
"The group is looking to have a product available in the marketplace in the next three to five years," Cappa said.
Chrysler, which has lagged rivals in its hybrid strategy, is working on a new generation of hybrid vehicles with lithium-ion batteries that are lighter and store more energy than the nickel-metal hydride batteries now in wide use.
Chrysler has not yet announced any partnership for the project or for the development of the batteries.
General Motors Corp and Toyota Motor Corp are racing to develop rechargeable hybrid vehicles using lithium-ion batteries.
GM's all-electric Chevy Volt is scheduled to go into production in 2010 while Toyota has said it will be testing a rechargeable version of its Prius hybrid with fleet customers around the same time.
Ford, which is building 20 plug-in hybrid SUVs on a demonstration basis, has said it expects to have a mass-market car in five to ten years.
Lithium ion batteries are widely used in consumer electronics but automakers have faced a range of issues, including cost and the risk of overheating, in adapting them for use in powering cars.
Chrysler, bought by private equity group Cerberus Capital Management last August, showed three "green" concept cars in January during the Detroit auto show that featured electric motors intended to be powered by lithium-ion batteries - Chrysler's ecoVoyager, Dodge ZEO and Jeep Renegade.
"Chrysler will produce technology similar to one of them or a combination of the three," Cappa said.
Chrysler's move comes as it is reeling financially from sinking sales of large SUVs and pickup trucks as domestic gasoline prices top $4 a gallon.
The Auburn Hills, Michigan-based automaker relies on sales of trucks and SUVs, such as the Dodge Durango SUV and RAM pickup truck, for almost 70 percent of its total sales at a time when U.S. consumers are increasingly demanding lighter and more fuel-efficient vehicles.
The rising popularity of gas-sipping hybrids is prompting automakers to invest in the development of hybrids and electric vehicles.
Toyota dominates the U.S. market for hybrid sales on the strength of the success of its Prius and expects to be selling over 1 million hybrid vehicles annually by early next decade.