This is the latest in a string of accolades for Volkswagen's new city model which has also been named Car of the Year by the prestigious and influential What Car? magazine – this shows that a lot of people think it’s pretty special.

So what is all the fuss about, well for starters the Up is a compact 3.5 metres long, three-door hatchback (a five-door follows later this year) that packs in a lot of passenger space.

Cute, but not especially cuddly, exterior looks are highlighted by extremely short overhangs, a tall body, large side doors,  black trimming around the grille and rear tail lights and prominent use of the VW badge front and rear.

The tall stance outside translates into a surprisingly generous and airy passenger cabin with plenty of head and leg room for four fully grown adults thanks to a 2.4 metre long wheelbase while the large opening doors are a boon for those with limited mobility.

A deep and upright dashboard houses a simple selection of instrumentation and controls, including three main read-out dials, all set within a retro and rather pleasing ‘metal effect’ trim that also appears on the door caps.

Height adjustable seats with an integrated head restraint provide a commanding upright driving position. Unfortunately the steering wheel is set slightly high for my personal taste which detracts from the overall excellent ergonomics.

Luggage space, over a high sill, starts off as a minuscule lunch box amount but then expands to a class leading 251 litres if you drop the top cover into its lower floor position. Rear seat options include a one-piece folding rear seat or, for preference, a 60/40 split rear seat that almost goes flat but not with the boot floor – however, it still releases up to 951 litres of space.

Motive force comes from a refined new generation one litre, three-cylinder, 12 valve  aluminium petrol engine which is offered in two power outputs, both matched to a five speed manual transmission. A five-speed automatic comes in the second half of the year and an electric Up is planned for 2013.

On the face of it neither engine is especially quick or notably frugal but when stacked against the opposition, always seems to come out on top and go about their work in a smooth efficient way with none of the buzz often associated with three pot units.

A BlueMotion version of the 60bhp output engine with Stop-Start technology, battery regeneration and low rolling resistance tyres will finally get the Up to below 100 g/km, stretch fuel consumption to 68.9mpg and costs £9,330.

Although the 60bhp is likely to be the most popular, based on cost, I would pay the extra for the 75bhp version as it trims more than a second off the sprint time - 13.2 seconds to 62mph - and is seven miles an hour faster on top speed. It feels a lot livelier and responsive and it doesn’t lose much – around 2mpg - when it comes to fuel consumption which is well worth paying for.

One of the best features of the front-wheel drive Up is the way that it rides and handles. Despite its height it exhibits no discernible body-roll in part due to the high torsional rigidity of the chassis and the very forgiving strut and wishbone front suspension and torsion beam rear axle with semi-independent suspension.

And there is a nice feel at the steering wheel from the electro-mechanically assisted system that varies the weight of input needed; firming up just enough at speed so Up is a fun car to drive as well as a very practical one.

Volkswagen offers the Up in three trim grades with prices starting at £7,995 for the entry level Take Up model which comes with items such as ABS with Hydraulic Brake Assist, radio and MP3 compatible CD player, engine immobiliser and height adjustable steering wheel.

Middle grade Move Up models (from £8,970) add in body coloured door mirrors and handles, manual air conditioning, driver’s seat height adjustment, electric front windows and remote central locking.

The top grade High Up (from £10,390) contributes chrome trim, leather steering wheel, front fog lights, heated front seats and a detachable five-inch touch screen Navigon Maps and More navigation, telephone, information and entertainment system read-out.

On top of this are two special edition black and white versions with extra features including 16inch alloy wheels and chrome door mirror caps plus a host of options including a City Emergency Braking system that detects the risk of an impending impact at speeds below 19mph and can, as a last resort, apply the brakes.

Finally let’s talk about the name. Volkswagen always show it in lower case with an exclamation mark as it appears on the rear of the car (i.e up!) – however most people are referring to it, as here as the Up so don’t get confused.

You might have expected Volkswagen to be making a great play of the name but, apart from the slightly laboured trim level titles, are assiduously avoiding making lots of puns in their advertising.

So, instead of being a deliberate marketing ploy, the choice of name can actually be traced back to the last small car from Volkswagen which you might recall was the Lupo. Drop the first and last letters and what do you get…..up! – possibly the ultimate in down-sizing.