The 2010 Smart fortwo is offered with a hard-top or a truck foldaway canvas roof.

We’re a nation that has long equated bigger with better, and nowhere is that more true than in the auto industry, where a car’s worth is normally measured by the pound and inch.

Not so, much of the rest of the world.  In markets like Europe and Japan, small is beautiful.  But as our own roads grow more crowded, with fuel prices rising and tough new emissions standards going into effect, even American motorists are beginning to appreciate downsized models like the Mini. But how small is too small?  Smart, it seems, may have pushed the envelope a bit too far.

Measuring barely eight feet, nose-to-tail, the fortwo microcar is, without question, the smallest mass-market product on U.S. highways. It defines a new generation of so-called “urban commuter cars.”

As the name suggests, the fortwo does, indeed, provide seating for two, with a modest bit of storage space in back.  There’s a hardtop version, as well as a sort-of convertible, which features a trick foldback canvas top that provides a more open driving experience than a conventional sunroof.

For those used to big SUVs, driving a Smart fortwo could be a daunting experience.  It’s nearly small enough to fit into the back of a Cadillac Escalade or the cargo bed of a Ford F-150.  So, it’s not surprising it’s more suited to driving around on local roads, rather than the interstates, where it does tend to be buffeted around by the gusts as 18-wheelers blow by.

Perhaps surprisingly, the Smart fortwo has done surprisingly well in federal crash tests, thanks to a unique safety cage that was developed to pass the so-called crash pulse around the passenger compartment.  Of course, you can’t recall the laws of physics, and in a battle between a fortwo and a big ute, you can guess which one is going to get punted the furthest.

The extremely short wheelbase makes you feel more like you’re climbing over, rather than simply jouncing across a speed bump.  Nonetheless, after spending a few hours behind the wheel, there’s something pleasant about the driving experience.  It’s got the sort of maneuverability of a go-kart, letting you dart in an around obstacles with ease.

Of course, it would help to have a bit more power.  Despite its size, the 70-horsepower coming out of the car’s 1.0-liter, 3-cylinder engine still feels a bit anemic.  Our bigger complaint has to do with the Smart fortwo’s electrically-shifted manual gearbox, however.  It’s just not up to the job, delivering bone-jarring shifts and taking a fair amount of time to do so.

The other problem is fuel economy.  On the positive side, you get 33 miles per gallon around town and a full 41 on the highway – for those willing to take to the interstates.  But considering the size of this little two-seater, it just doesn’t seem like quite enough, not when even some compact 4-doors are starting to push into the mid-30 mpg range and hybrids are well into the 40s.

At $12,635, the base Smart fortwo is priced pretty much up against some larger Korean and Japanese 4-seaters – the Hyundai Accent, for example, starts at $10,690.  The fortwo Passion convertible, meanwhile, will set you back $17,635, a significant penalty for that canvas top and a few more creature comforts.

The Smart fortwo had a fortuitous debut in the U.S. market, launching in early 2008, just as U.S. gas prices began their climb to a record $4 a gallon.  But the brand’s initial success didn’t last long.  Last year, with fuel prices averaging somewhere in the mid-$2 range, and the overall auto market in a decades-low slump, sales of the Smart fortwo plunged 38%.  And things haven’t gotten notably any better this year, even as the rest of the industry shows signs of recovery.

Part of the problem is the age of the fortwo, which really hasn’t seen much change in nearly a decade on the market.  The reality is that what originally seemed like a visionary project for Smart’s parent, Daimler AG – which also produces the Mercedes-Benz brand – the little line-up has been nothing but a money loser.  Shortly before introducing Smart to the U.S., Daimler killed off all the other models in the brand’s line-up.

For those who really would like a car of Smart proportions, the good news is that Daimler has just announced a new partnership with the Euro-Asian Renault-Nissan Alliance. (Click Here for the full story.)  The French maker will take the lead in developing a replacement for the Smart fortwo – which will also serve as the basis for a new Renault Twingo.  Better yet, a four-seat model – which we’re betting will be called the Smart fortwo – is also under development.

The Smart fortwo has a number of flaws, yet there’s something that’s still fun about it, all the more so if you’re looking for something small and nimble to run in-town errands.  With a few updates, this could be a truly significant offering, one that would define the urban commuter car.