You have probably heard of some chatter about a possible partnership between BMW and Toyota in regards to environmentally-friendly technologies.

Well looks like there was substance behind the rumors after all and both companies have announced a collaborative effort today. A memorandum has been signed between the two auto brands which will see BMW supply Toyota’s European division with the company’s 1.6 liter and 2.0 liter diesel powerplants in 2014.

“It is a great joy and a thrill to enter into this mid-to-long-term collaborative relationship with BMW, a company with its own culture and history from its many years of car manufacturing in Europe, and a company that makes cars that are fun to drive. In the spirit of contributing to furthering the development of the auto industry and society, both companies will bring their wide-ranging knowledge-starting with that concerning environmental technologies-to the table and make ever-better cars,” said Akio Toyoda, Toyota’s president.

BMW’s Chairman of the Board of Management Norbert Reithofer said, “Toyota is the leading provider of environment-friendly series technology in the volume segment and the BMW Group is the most innovative and sustainable manufacturer of premium automobiles. We are now joining forces to further develop environment-friendly technologies and to expand our innovation leadership in each of our segments.”

“Supplying Toyota with our fuel efficient and dynamic diesel engines represents another important step in the planned expansion of our sales activities for engines and powertrain system,” he added. This deal is part of a memorandum which covers collaborative research into next generation environmental friendly technologies, such as lithium-ion battery technology.

In this day and age, it’s making more sense to expand your horizons by working with others. Toyota, it seems, is certainly of this belief – word has it that the Japanese automaker is discussing a broad partnership in environmental vehicles with BMW, including procuring diesel engines, according to reports. The proposed arrangement will see BMW providing diesel engines for Toyota’s passenger vehicles sold in Europe, in all likelihood 2.0 litre versions for midsize cars. No word as to the scale of the arrangement, and when it’s due to begin, as of yet.

Meanwhile, the partnership will see BMW being able to leverage the benefits of scale for diesels, and the move is also seen helping the German automaker improve the competitiveness of its green vehicles, where it will be able to expand its lineup by working with Toyota, which is expected to share its technologies for hybrid systems and related areas if requested, the reports add.

Toyota has struggled to improve its market share with its hybrids in Europe, where roughly 60% of passenger cars are powered by diesel engines. The company’s European sales fell by 9% to about 810,000 units in 2010, and it holds only a 4% share of the market. With demand for diesel vehicles forecasted to grow, the deal would help Toyota reduce development expenses by having domestic and Polish factories make diesel engines for fewer models.

The world’s major automakers have been reluctant to form partnerships in eco-friendly vehicles as each seeks to gain a competitive edge by promoting original technologies, but with demand for green vehicles growing in line with rising crude oil prices, it has prompted automakers to join forces to slash development costs for core technologies, as well as capital investment, in order to cut vehicle prices.

If it comes through, the move will be Toyota’s second green-technology tie-up with another major automaker, following its agreement in August to develop hybrid-vehicle systems with Ford.