The news sent the company's shares up 3.6 percent in after hours trading on the Nasdaq exchange. The shares closed down 6.1 percent, or 52 cents, at $8.01 during the regular session.
The supply agreement builds on an earlier deal by the companies to jointly develop batteries for electric vehicles for the Navistar Modec Electric Vehicle Alliance, a joint venture between Navistar and Modec Limited of the U.K.
A123 said it will manufacture battery systems for the eStar electric delivery vehicle at its Livonia, Michigan facility.
The electric truck, which has a payload capacity of two tons, will be assembled in Wakarusa, Indiana, and is scheduled for launch in mid-2010, the companies said.
A123's battery pack will enable the Navistar electric vehicle to have a 100 mile-range on pure electricity.
A123 also has announced battery-supply partnerships with Chinese automaker SAIC, German luxury car makers Daimler AG , BMW and Fisker Automotive.
(Reporting by Poornima Gupta; editing by Andre Grenon) Keywords: A123/NAVISTAR (email@example.com; 415-677-3934; Reuters Messaging: firstname.lastname@example.org) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.