The German automaker hopes to start importing the battery for use by 2012, the Nikkei newspaper reported on Sunday, citing company sources.
By working with Sanyo, Volkswagen hopes to catch up with rivals in eco-friendly vehicles, the newspaper said.
Lithium-ion batteries are widely used in personal computers and cellphones, and Sanyo has the largest global market share for them.
Toyota, which has enjoyed enormous successes with Prius hybrid model, has worked with Matsushita Electric Industrial, known for its Panasonic brand, to start mass-production of a lithium-ion battery for use in Toyota's hybrid models by 2010, the Nikkei said.
Nissan and Japanese electronics giant NEC have also agreed to start mass-producing a lithium-ion battery for a more eco-friendly vehicle than is possible with nickel-hydrogen batteries, which are used widely in vehicles now, the Nikkei said.
The lithium-ion battery that Sanyo and Volkswagen will develop will be smaller than a nickel-hydrogen battery, making it possible to design lighter cars than those using conventional batteries, the Nikkei said.
Sanyo is going through a restructuring and believes its battery business is key to its turnaround.
Sanyo is currently manufacturing nickel-hydrogen batteries that can be recharged repeatedly and supplying them to Honda and Ford.
Volkswagen and subsidiary Audi AG will also adopt Sanyo-made nickel-hydrogen batteries for use in the Volkswagen group's first hybrid model, to be rolled out as early as next year, the Nikkei said.