Pity the makers of small city cars. The car market is heading relentlessly upmarket, so the act of designing and building a small car that meets a budget while also sating the demands of increasingly luxury-savvy consumers is a tough economic tightrope. Enter Peugeot 208, the latest in a long and noble line of small Peugeot hatchbacks, tracing all the way back to the 104 model of the early 1970s.

Gone are the days when million-selling hatchbacks were built to a strict budget and it showed. These days, even the most populist car-maker needs to load their smallest models with equipment, high quality materials and 'premium' design touches if they want to stay in the game.

Thankfully for manufacturers, us car buyers have been gently led down a road that will generate significant profits. Ever since BMW's new Mini hit upon the idea of a premium city car awash with expensive options, the small car market has been thick with imitators.  Audi's A1, Fiat's 500, the forthcoming Vauxhall Adam, the Citroen DS3, the Volkswagen Up!; all seek to bring premium values to compact cars.

Peugeot's distinctively boxy 104 hatch was succeeded by the 205 in 1983, a svelte 5-million seller that cemented Peugeot's reputation as a champion small car maker. Since then, with the 206 and 207, the basic template has been slightly trampled, as the lithe forms of the earlier cars were supplanted by a clumsy design language and, worst of all, a bypass for the Gallic charm.

The company fervently hopes that the 208 will recapture that lost spirit and help bring its small cars to a new generation of design-aware buyers. First impressions are very favourable, for this is an undeniably good looking car, marred only by slightly awkward detailing like the odd flash of excess chrome and overly sculpted flanks that look like a passing horse has lashed out with a hoof.

Best of all, Peugeot have thankfully ditched the unhappy front-end treatment of the past few years. We're still not quite at Pininfarina levels of perfection, but the 208 is compact, neat and trim. Inside, too, it is spacious and airy, thanks to a sizeable glass roof. It's light around town and relatively nippy, although the graphics on the smartphone-imitating central screen could do with some simplification.

For die-hard Peugeot aficionados, the real test will come next year when a new 208 GTI is launched. The original 205 GTI is still something of a legend amongst those in the know, a sublime blend of balance, lightness and power that was the template for small performance cars for decade. The 208 GTI, previewed by a concept earlier this year, certainly looks the part, and time will tell whether the functional simplicity of its forebears will translate to the modern era.