TOKYO - Honda Motor Co has taken a big step toward developing a new hybrid system for larger cars, its head of automobile research and development said on Friday, indicating a finished product could be about three years away.

We've left the research stage and entered the field of development, Tomohiko Kawanabe, chief operating officer of automobile R&D at Japan's No.2 automaker, told Reuters in an interview.

Honda's gasoline-electric cars such as the Insight and the CR-Z, to be launched next week, use a single electric motor, unlike Toyota Motor Corp's two-motor Prius. Honda's hybrid system has the advantage of being simple and cheaper but trails Toyota's full hybrid system in fuel efficiency.

Honda had originally planned to raise fuel efficiency in its bigger cars by using clean diesel technology, but abandoned that strategy in late 2008, instead switching to developing a hybrid system that can be mounted on larger cars such as the Odyssey minivan and Pilot SUV.

Kawanabe declined to specify when the new hybrid system would be ready, but said it would be roughly the same time frame as the three years it takes on average on develop a new vehicle.

Kawanabe said Honda was also studying development of a small diesel engine, seen as crucial to sell cars in some emerging markets including India, as well as in Europe, where more than half the vehicles sold are diesel.

If you want to compete in markets like India, and also Europe, (a small diesel engine) is necessary, he said.

Honda only has a 2.2 liter diesel engine mounted on the Accord and other models in Europe.

(Editing by Michael Watson)