The electric car maker will begin selling the Model 3 at a discount to $35,000 from its $70,000 launch price in January, with the first cars arriving this month.
The Model 3 will be sold in a limited number of locations across the United States, with limited availability of the new model in the United Kingdom, Australia and New Zealand.
The announcement came during a panel at the Consumer Electronics Show (CES) in Las Vegas.
The unveiling came after Tesla CEO Elon Musk revealed the first batch of production cars will be in production for at least a month.
Musk said the Model S is also set to arrive this year and the Model X in 2020.
The first car, which was revealed as a teaser at CES last week, is expected to be the most affordable electric vehicle currently available.
The Tesla Model S will cost $70 a month and it is expected that a limited quantity of the Model III, which is also expected to cost $35 a month, will be made available.
The Model S has a range of 238 miles (375km) on a single charge.
It has an eight-speed manual gearbox and a 0 to 60 mph (9.5 to 12.3 km/h) in just under four seconds.
The vehicle has been criticised for not being quick enough for the streets and has been blamed for the deaths of three people, including a toddler, in an accident in California last year.
The company has faced a string of lawsuits over the death of the toddler.
Tesla has already received more than 100,000 applications for the Model Three, including an order for 3,000.
The launch comes after Musk said last month that he believes Tesla will sell 1 million vehicles this year.
While it is not clear when the first batches of the vehicles will be released, Musk said that the car maker would likely start producing in March, with production set to start at Tesla’s Fremont, California, factory.
Tesla’s stock, which has risen in the last year, rose to a record high of $52.25 on Wednesday.