BMW facing higher fuel-efficiency requirements under the Obama administration, is bringing four-cylinder engines back to the U.S. 12 years after it quit offering the slow-selling option.

BMW says it will offer a four-cylinder engine in its Z4 roadster and 5-Series midsize sedans when they begin arriving on U.S. dealer lots by October, and the company says more nameplates will get the smaller engine with the Munich-based automaker’s TwinPower turbo. BMW dropped the engine from its 3- Series line in 1999, when gasoline cost $1.14 a gallon.

“It wasn’t in line with our image, because it didn’t have the performance of the six cylinder,” said Jim O’Donnell, head of BMW’s U.S. operations. “We were selling ourselves as the ultimate driving machine and really it wasn’t. Now that the engines have developed so far, it’s not an issue at all.”

BMW, this year’s top-seller of luxury autos in the U.S., joins Daimler AG (DAI)’s Mercedes-Benz and Volkswagen AG (VOW)’s Audi in bringing new turbo-charged, four-cylinder engines to the U.S. as the Obama administration pushes the industry for increases in fuel efficiency to reduce dependency on imported oil.

The U.S. corporate average fuel economy, or CAFE, requirement is rising to 35.5 mpg by 2016 and to 54.5 mpg by 2025. It increases to 30.1 mpg this year, according to the U.S. Environmental Protection Agency, up from 27.5 mpg in 2010.

Regulatory Driven

“CAFE is definitely driving this,” O’Donnell said in an interview in Monterey, California. “This is huge for us. If we get this wrong, it screws up all of our plans in the U.S.”

BMW’s CAFE rating for passenger cars was 29.9 mpg in model year 2011 and 25.5 mpg for its light trucks, according to the National Highway Transportation Safety Administration’s website. Daimler’s CAFE for passenger cars was 26.9 mpg and 21.1 mpg for light trucks.

Failure to meet U. S. requirements produces fines of $55 per mile below the requirement multiplied by the total number of vehicles sold, Greg Schroeder, a research analyst at the Center for Automotive Research in Ann Arbor, Michigan, said in a telephone interview.

Selling 200,000 vehicles with a CAFE 20 mpg below the target, for example, would lead to an annual fine of $220 million.

“As the fuel economy doubles they have to change their plan,” Schroeder, the industry analyst, said. “They’re going to have to improve fuel economy, they can’t just sit and pay fines forever.”

Mercedes paid fines totaling $2.94 million in 2009, according to NHTSA’s website. BMW paid $5.1 million in fines in 2006, the site said.

Ignoring Customers

While consumers have been demanding more efficient vehicles as gasoline prices approached $4 a gallon this year, it isn’t clear that fuel prices will remain high enough to keep demand in line with rising fuel-economy standards. Analysts including Tom Libby of R.L. Polk & Co. see a risk of the government pushing the industry to make cars that people don’t want to buy.

“A lot of these powertrain decisions and product programs we’re seeing going forward, people will be thinking, ‘Gee, why would a customer want that?’” said Libby, who studies the industry for Woodcliff Lake, New Jersey-based Polk.

As the market shifts to smaller engines, brands such as BMW may have some advantage with image of “being more fun or emotional than some of the other luxury brands,” he said.

The average cost of regular unleaded gasoline in the U.S. was $3.61 on Aug. 28, down from $3.99 on May 4, according to the AAA’s Daily Fuel Gauge Report.

3-Series Engine

BMW’s 3-Series line, which includes coupe and wagon versions as well as the sedan, will be sold again with a four- cylinder engine, said a person familiar with BMW’s plan. Within two years, the smaller engine may make up half the 3-Series models sold in the U.S., said the person, who asked not to be identified because the plans aren’t public.

As much as 40 percent of the company’s U.S. sales may end up being four-cylinder models, the person said.

Robert Filipovic, BMW advanced market research and strategy manager, declined to comment on planned uses for the smaller engine.

BMW is on pace to become the top-selling luxury auto brand in the U.S. this year. Deliveries through July rose 13 percent to 135,114, placing it 5,182 sales ahead of Mercedes. Deliveries by Toyota Motor Corp. (7203)’s Lexus brand, No. 1 in the U.S. for 11 years, fell 19 percent to 102,549 through July because supply was limited by Japan’s earthquake and tsunami in March.

Mercedes, Audi

Mercedes will offer a new direct-injection, four-cylinder turbo engine in the entry level C-Class sedan and coupe in October and SLK250 roadster early next year.

Volkswagen AG’s Audi brand has added a small engine to its redesigned A6 midsize sedan, joining a lineup of four-cylinder models.

“It’s a more efficient engine in terms of fuel economy,” said Schroeder, the analyst at the Center for Automotive Research. “They have to do something to improve fuel economy and that’s one of the easier ways to do it.”

In 1999, BMW’s final year with four-cylinder engines in the U.S., it sold fewer than 900 of the 3-Series cars with the smaller powertrain, down from 21,078 of them in 1995, according to BMW.

“The challenge really is for us as a company and you as media to look at how we describe performance, which tradition would tell is the number of cylinders and how big they are, and that determines a premium car or a high-performance car versus another car,” Ian Robertson, head of BMW sales, said in Carmel, California. “That is not the relevant measure anymore.”

Faster, Thriftier

Consider the new Z4. While the horsepower in the new four- cylinder Z4 falls 6 percent to 240 from the previous version’s six-cylinder, the torque increases 18 percent. As a result, the roadster equipped with a manual transmission can accelerate from zero to 60 mph in 5.5 seconds, 0.1 second faster than the 2011 model with six cylinders, the company said in a presentation.

BMW hopes to get almost a 20 percent fuel-efficiency improvement with the Z4, said Filipovic, the strategist.

The midsize 5-Series, which begins production with the small engine in September, will probably have similar horsepower as the previous six-cylinder version with 13 percent more torque, BMW said. It should accelerate faster, slicing 0.4 seconds from its zero-to-60 time. BMW expects to get better than 32 mpg, Filipovic said.

Mercedes’s last four-cylinder offering in the U.S. came in the 2005 model year C-Class.

“The consumer trend really demanded the V6,” said Sascha Simon, manager of advanced product planning at Mercedes-Benz in the U.S. “People didn’t want to touch the four-cylinder.”

Better Technology

Advances in engine technology allow for better performance from smaller engines, executives at both BMW and Mercedes said. Mercedes expects mileage on the C-Class with the four-cylinder to improve to 31 mpg on the highway from 24 mpg with the six- cylinder vehicle, Simon said.

They’ve “really enabled us to harness more of the power that is in the chemicals that you burn in a combustion engine,” Simon said. “Future four-cylinders that we are going to launch in the next years will have higher output and horsepower than today’s V6s and at the same time, while you get that higher output, you can actually save fuel.”