TOKYO, Dec 16 (Reuters) - Toyota Motor Corp has suspended a project to develop a 1.6-litre diesel engine with truck maker Isuzu Motors Ltd due to uncertainty over vehicle demand, Japan's top automaker said on Tuesday.

The two automakers had planned to start producing the engines, to be mounted on Toyota cars in Europe, in 2012.

"A decision was made early this month to suspend the project," a Toyota spokesman said, citing slumping sales.

Toyota has said it is reviewing all projects in its pipeline to find ways to cut costs as it faces pressure on profits. On Monday, it said it would suspend work on a new U.S. plant that was scheduled to build the Prius hybrid from late 2010.

Shares in Toyota and Isuzu, in which Toyota has a 5.9 percent stake, ended morning trade in Tokyo flat, against a 0.7 percent decline in the Nikkei average.