The latest engine in the Peugeot 307 range - available in the three-door hatchback, the five-door hatchback as tested here, and the SW estate - is the two-litre HDi 136 turbo diesel from the PSA/Ford stable, mated in the XSi model with a six-speed manual transmission. Altogether, this is a difficult-to-resist combination when it comes to mid-range performance, economy and dynamics.With multiple injection in six distinct phases, and the latest type of particulate filter, here is one of the new-generation engines which are raising the diesel game in almost all departments, not least in quiet running and refinement. And it remains the case that PSA Group turbo diesels of this size tend to be less thumpy under acceleration than many of their German rivals.Power and torque from the new alloy-head engine are away ahead of the previous two-litre HDi 110, which has been around since 1998. The latest variable geometry turbocharger offers better throttle response, and this is another diesel with an overboost facility. In normal circumstances maximum torque is 240lb/ft at 2000rpm, but when you floor the throttle it rises, for a brief but sufficient period, to 255lb/ft from 1750rpm.That makes overtaking or a sharp blast out of an uphill bend a much livelier affair than the words "two-litre diesel" suggest. Quite wisely, I think, the system is arranged so that the overboost doesn't chime in while the car's in first or second gear. But when you've got all that boost from 1750rpm in third or a higher ratio, there's nothing serious missing.The six-speed box is unusually compact in design, weighs very little more than the five-speed, and provides really smooth changes - once again, with a more flowing movement across the gate than many cars from the far side of the Rhine.With the extra performance has come additional braking power, and the XSi - which also has switchable ESP - really hauls off speed when needed. Brake assist is standard, too.The quite sporty XSi specification includes items like front foglamps, leather/fabric seats, a leather-rimmed steering wheel, a 5-CD autochanger and a metallic finish to the fascia and console, and the 307 still gets high marks for those bevelled instrument rims.Thanks to the fairly cab-forward design, there's decent back-seat passenger accommodation. And although you wouldn't expect it after a quick glance at the rear end of the car, the 307 has plenty of luggage space, even with a full-sized spare wheel underneath.Out on the road, the accelerator response, the mid-range performance and the smooth inrush of power and torque are all impressive. The 136 is a real Q-car, in the sense that its quite modest appearance gives little indication of just how quickly it can motor if the driver feels like getting a move on. Yet it runs so quietly at motorway speeds - needing just under 2000rpm in sixth at 70mph, and with an acoustic hood over the engine anyway - that a long-distance cruise won't cause any strain.As well as that, this is definitely one of the best models in the Peugeot range when it comes to a balance between handling and ride. The lowish-profile Pirelli tyres aren't too extreme, and, although the front springs and dampers have been modified to suit the extra weight and perked-up performance, there's little sense of being flung off track when the car is dashing along bumpier back roads. Engine 1997cc, 4 cylinders Power 134bhp Transmission 6-speed manual Fuel/CO2 52.3mpg / 142g/km Acceleration 0-62mph: 9.8 seconds Top speed 126mph Price From £18714.00 approx Details correct at publication date