The source, who declined to be named, did not say when production would begin.
Tesla declined to comment. Its shares were up 3% in pre-market trading in the United States at 0910 GMT.
The steep price tag of electric cars - compounded by high interest rates - is one of several factors holding back uptake of the technology in Europe and the United States, consumer surveys show.
The average retail price of an EV in Europe in the first half of 2023 was over 65,000 euros, according to autos research firm JATO Dynamics, compared to just over 31,000 euros in China.
Musk had long planned to make a more affordable electric car, but said in 2022 he had not yet mastered the technology and shelved the plan.
Still, sources told Reuters in September the carmaker was closing in on an innovation that would allow it to die cast nearly all of the underbody of the EV in one piece, a breakthrough that would speed up production and lower costs.
Expanding into the mass market is critical to meeting Tesla's aim of increasing vehicle deliveries to 20 million by 2030, setting it apart from competitors like Volkswagen (VOWG_p.DE) who have shied away from setting delivery targets and instead focused their strategies on protecting profit margins in the transition to EVs.
WAGE HIKE
Chief Executive Elon Musk visited the plant in Gruenheide on Friday and thanked staff for their hard work, a video showed on Musk's social media platform X.
At the same meeting, he informed staff of plans to build the 25,000-euro vehicle there, the source said.
The German plant currently produces the Model Y, Europe's best-selling EV.
Local authorities said in October they had asked the carmaker to submit further information on how its expansion plans would adhere to nature conservation laws and would then make a decision on whether to approve them, without providing a timeframe.
Tesla also informed workers on Friday that all staff would receive a 4% pay rise from November onwards, with production workers receiving an additional 2,500 euros per year from February 2024 - equivalent to an 18% pay rise in 1-1/2 years.
German union IG Metall said in 2022 that Tesla wages were around 20% below those offered under collective bargaining agreements at other carmakers.
($1 = 0.9315 euros)
