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In recent years, attention has been focused on a hybrid vehicle capable of substantial reductions in CO2 exhaust emissions. This paper describes the newly developed 1.8-liter 2ZR-FXE gasoline engine for use with a hybrid system for compact vehicles, which effectively combines higher driving performance with higher fuel efficiency. This engine was based on the 1.8-liter 2ZR-FE engine with outstanding performance and fuel efficiency. This engine has achieved high thermal efficiency by using the high-expansion ratio cycle “Atkinson cycle”, as with the previous 1NZ-FXE engine. Additionally, a new cooled Exhaust Gas Recirculation (EGR) system and electric water pump were adopted to further improve fuel efficiency. A high efficiency cooler was used to cool the EGR gas, which enabled the introduction of the EGR gas at high load conditions, and exhaust gas temperature was reduced.