Mitsubishi Heavy Industries said it would launch a USD$1 billion project to build Japan's first passenger jet, taking a big gamble on a market dominated by Canada's Bombardier and Brazil's Embraer.

Japan's largest heavy machinery maker has spent several months sounding out airlines to see if there would be sufficient demand for the lightweight, fuel-efficient jet, which will hold 70-90 passengers and be used for short and mid-range routes.

The project won a vote of confidence on Thursday when All Nippon Airways said it would buy up to 25, the first carrier to commit publicly to the jet. Japan Airlines has also said it was considering an order.

Mitsubishi Heavy is not alone in trying to break into a market seen to have strong growth potential.

Russia's United Aviation has teamed up with Boeing to build a new Superjet 100, which will carry 75 to 95 passengers, while China's AVIC I is building the country's first regional jet, called the ARJ21.

"There is demand for the planes, but the competition is tough," said Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management.

A subsidiary will be set up on April 1 to oversee the project. It will start out with capital of JPY3 billion yen and aim to increase that over about a year to JPY100 billion, two-thirds of which will be shouldered by Mitsubishi Heavy itself.

Development costs are expected to come to JPY150 billion - JPY180 billion, Mitsubishi said.

Mitsubishi Heavy said it would tap Toyota, trading houses Mitsui, Mitsubishi and Sumitomo, and state-owned Development Bank of Japan for the rest.

Mitsubishi Heavy said it hopes to have the jet in the air by 2013. The company has said in the past it would aim to sell 1,000 of the jets over the next 20 to 30 years, grabbing one-fifth of expected new demand in the market.

Pratt & Whitney will supply engines for the jet.