The two companies said in a joint statement they would share technologies and vehicle platforms. Under the proposed alliance, Fiat would not invest cash in Chrysler but would provide access to its successful small-car platforms, as well as to its more environmentally friendly and fuel-efficient engines.
The statement said Fiat would take an "initial" 35-percent stake, suggesting the deal may be broadened. It stressed that under the agreement the company is not committing to funding Chrysler in the future.
"A Chrysler-Fiat partnership is a great fit as it creates the potential for a powerful, new global competitor, offering Chrysler a number of strategic benefits, including access to products that complement our current portfolio (and) a distribution network outside North America," said Bob Nardelli, Chairman and CEO of Chrysler LLC.
Fiat Group SpA, which makes Fiat, Lancia and Alfa Romeo vehicles, is trying to re-enter the United States market. The company has expressed interest in bringing its Fiat 500 compact car and the Alfa Romeo brand to the U.S.
The alliance is subject to a review of company finances and regulatory approvals, including by the U.S. Treasury Department, which last week announced an emergency bridge loan for Chrysler, which analysts say will have difficulty surviving as an independent company.
"This initiative represents a key milestone in the rapidly changing landscape of the automotive sector," said Fiat CEO Sergio Marchionne.
"The agreement will offer both companies opportunities to gain access to most relevant automotive markets with innovative and environmentally friendly product offering, a field in which Fiat is a recognized world leader, while benefiting from additional cost synergies," he said.
Chrysler, which is 80.1 percent owned by Cerberus Capital Management LLP, has been hurt by its reliance upon slow-selling trucks and sport utility vehicles and analysts have said it may not survive the year as an independent company despite receiving the $4 billion government loan.
The Treasury Department said Friday it will provide a $1.5 billion loan to Chrysler's financing arm, Chrysler Financial, and the automaker plans to offer zero-percent financing on several models and expand lending to car buyers with less than ideal credit.
Nardelli said the partnership would provide a return for taxpayers on the loan, "securing long-term viability of Chrysler brands," boosting consumer confidence and "preserving American jobs."