Why the VW Passat diesel (really!) might be the sedan to beat

FORTUNE — Volkswagen AG’s new Passat midsize family sedan this fall will tussle for buyers with formidable competitors like Toyota’s (TM) Camry, Honda’s (HMC) Accord, Ford’s (F) Fusion and Chevrolet’s (GM) Malibu.

Midsize sedans play in the the fattest, most important slice of the U.S. Automotive market, one where companies fight the hardest to gain share. Thorough May, midsize cars comprised more than a half of all cars sold in the U.S. And more than a quarter of all vehicles sold, including minivans and sport utilities.

Passat has been in the U.S. Since 1973, but in a size too small for shoppers of family sedans, The newly-designed Passat has one advantage over the others: an optional diesel engine. None of its peers offer diesel, giving the Passat a distinctive selling point, especially for road warriors looking for fuel efficiency and long lags between fill-ups.

The enlarged Passat, built at a newly-built factory in Chattanooga, Tenn., was designed specifically for American families and to steal customers from the current sedans, consistent with the German automaker’s self-proclaimed push to be the world’s top seller by 2018.

“We are keeping all the characteristics that will identify Passat with German precision and engineering,” said Serban Boldea, product marketing manager. Yet all models will include features like Bluetooth phone connection and dual-zone climate control that American consumers favor.

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About three-quarters of all Passats ordered will come equipped with a 2.5-liter, five-cylinder gasoline engine that burns regular unleaded fuel, respectable fuel efficiency of 22 miles per gallon in the city, 31 miles per gallon on the highway. VW’s TDI Diesel gets 31 mpg in the city and an impressive 43 mpg on highway. Even with diesel fuel’s slight cost premium over regular unleaded, superior efficiency means a comparable operating cost to a gas-electric hybrid.Given VW’s 18.5-gallon fuel tank, the largest in the segment, the TDI has a range of 795 miles, permitting a round-trip between Detroit and Chicago on a full tank. The vehicle compares favorably, in terms of cost of fuel per mile traveled, with Toyota’s Camry hybrid, Ford’s Fusion hybrid and Hyundai’s Sonata hybrid – midsize competitors with shorter highway range.VW still has to overcome the prejudice of some American drivers against diesel, which suffers from the outdated impression that they reek, produce sooty smoke and are noisy. Today’s diesel complies with exceptionally strict air-quality standards. (VW, it must be said, is responsible for at least some prejudice, owing to its abysmal diesel Rabbit models of bygone years.)

In a daylong drive across Tennessee’s rolling countryside the Passat performed admirably, imparting the tight, solid ride and handling for which the German auto industry has grown justifiably renowned. The diesel, with less power and better torque than the 2.5-liter gasoline model, actually handled the hills with more authority than the gas version.

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Engineering advances have made diesel engines much quieter than earlier versions, with none of the malodorous emissions that turned off so many drivers. German engineers have a point when they insist that if drivers seek fuel economy, diesel compares well against gas-electric hybrids on the grounds of simplicity and ease of maintenance.

The least expensive gasoline-powered Passat will start at a retail price of under $20,000. The least-expensive TDI Diesel will start at $26,000, rising in price to about $32,000 with frills such as navigation, larger wheels, sunroof and power seating.

VW finally has the car that earns consideration against some of the most popular family sedans on the road, especially those powered by hybrids. And with diesel, VW may get a second-look from consumers determined to squeeze every last mile from their fuel budget.