Cadillac knows its future lies in small cars, especially if it wants to be considered a global player, but GM’s financial woes means the company has had to pare back some of its more ambitious plans. In the latest viability plan, GM CEO Fritz Henderson revealed that Cadillac would have to scale back on its European expansion plans, while development of new diesel models plus a RWD 3-series rival have been put on hold. Instead, the GM luxury division will focus on its performance in existing markets, including North America, parts of Asia, Eastern Europe and the Middle East, as well as the development of a sub-CTS model based now on the FWD Epsilon II platform.

Epsilon II is a global platform, which underpins cars like the upcoming 2010 Buick LaCrosse and Opel Insignia, and according to MotorTrend it will also be used for a replacement for Cadillac’s poor selling BLS. Codenamed GM 166, the new car will be available in both FWD and AWD and will be priced somewhere between the LaCrosse and CTS. Expect pricing to fall around the $34,000-$35,000 mark, pitting as a prime target for the Lexus ES 350.

This sub-CTS model is expected to be Cadillac’s highest volume model but it won’t be just another BLS. Instead, the car has been described as a brand new global model with “dedicated architecture and content.”

According to the source, GM 166 will be bigger than its LaCrosse and Insignia cousins and will arrive sometime in 2011. The bad news is that the much-hyped 3-series rival, rumored to be based on a brand new RWD platform called Alpha, is most likely dead.