Musk said the car is the "next logical step" of Tesla's "secret master plan" to make the world more sustainable. Excited? Here's everything you need to know...
The five-door sedan Model 3 will have a range of at least 215 miles, and will go from 0-60mph in less than six seconds - although some versions will go "much faster", said Musk.
With front and rear boots for storage, he added that the car will be long enough to fit a seven-foot surfboard inside.
"Smart design maximises interior space, to comfortably fit five adults and all of their gear."
Worried about losing power? The company will double the number of Superchargers it has available to 7,200 by the time the Model 3 is released.
That's all we have so far - Musk said a second launch will take place later...
Thanks for tuning in to the Model 3 unveil Part 1! Part 2 is super next level, but that's for later…— Elon Musk (@elonmusk) April 1, 2016
Pre-orders of the Model 3 have already started - but production won't begin until late 2017, when Tesla will begin making 500,000 vehicles a year.
The big number
As expected, the Model 3 will cost $35,000 (£24,500) before incentives. To pre-order it, you'll need to pay a deposit of £1,000 - although Musk has made clear that is fully refundable if you decide to cancel your order.
Here's what Musk had to say...