Drivers face having their every move tracked by a 'spy in the car' black box.
The system will constantly check a vehicle's speed - making cameras redundant - and allow for pay-as-you-go tolls.
The £36million EU project is partly funded by the UK Government and backed by car makers and the telecoms industry.
It will be unveiled later this year with a view to its integration into future cars. Manufacturers suggest this could be as early as 2013.
Vehicles fitted with the system will emit a constant 'heartbeat' pulse revealing their location, speed and direction of travel.
EU officials believe the technology will significantly reduce road accidents, congestion and carbon emissions.
But civil liberties campaigners say it will have profound implications for privacy by creating a Europe-wide system of Big Brother surveillance.
The European Commission has already
asked governments to reserve a radio frequency for the system to operate on.
Engineers say the system will be able to track cars to within a yard, making it significantly more accurate than existing satellite navigation technology.
Experts say the system will link up easily with the pay-as-you-drive road tolls being backed by the Government.
The system allows cars to 'talk' to one another and to roads wired up to the system. A communication device behind the dashboard transmits the car's location every half a second.
The messages are transmitted through mobile and wireless networks, as well as on short-range microwave or infrared routes. Vehicles will be able to warn each other if they are on collision course.
The location data will also be picked up by roadside detectors and mobile phone towers. That will allow traffic lights to turn green when vehicles approach.
Data on cars will also be sent to traffic control centres to allow police or civilian controllers to monitor and even direct vehicles.
General Motors - the troubled owner of Vauxhall - is among those trialling the technology.
