The four-door hatchback, which has a base sticker price of $29,950, "offers it all," said Ron Cogan, publisher of Green Car Journal, which sponsors the annual award, praising the car's sporty performance and superior fuel economy.
The winner's "quiet, clean diesel engine delivers loads of low-end torque and a fun-to-drive experience, all with the functionality of a five-passenger hatchback," Cogan said.
The A3 TDI (which stands for turbo direct injection) has an EPA highway fuel economy rating of 42 MPG -- a 50% improvement over the gasoline-powered A3.
The other finalists for the award were the 2010 models of the Honda Insight hybrid, Toyota Prius hybrid, Volkswagen Golf TDI and Mercury Milan hybrid, the only nominee from an American automaker.
The A3 TDI is powered by the same engine as last year's Green Car of the Year, the VW Jetta TDI. Audi is owned by Volkswagen.
Consecutive victories by clean-diesel technology over gas-electric hybrid cars gave Johan de Nysschen, president of Audi of America, an opportunity to wag a finger at Washington policymakers who have fallen in love with hybrid and all-electric technology.
Nysschen called on politicians to define the fuel economy and environmental targets they want automakers to meet and then "let the industry pick the technology."
Diesel power trains, which are common in Europe, have been a tough sell in America, where consumers retain bad memories of the smoky, poor-performing diesel cars that roamed the nation's highways in the 1970s.
Nysschen said he believed American car buyers would slowly come around to the idea of diesel as a viable option in the hunt for higher mileage. He said an A3 TDI driven from New York to Santa Monica achieved fuel economy of up to 51 MPG at certain points on the trip.