Fiat Group SpA still wants to forge an alliance with Chrysler LLC if the United States auto maker is forced to file Chapter 11 bankruptcy protection from creditors, a source close to the Turin-based auto maker said Monday.

 

Fiat is continuing talks to reach a deal by the Thursday deadline, the source said.

 

Fiat CEO Sergio Marchionne was in the US over the weekend engaged in discussions.

 

The U.S. government has mandated that Chrysler must take on Fiat as a partner, cut debt and reduce labor costs by Thursday if it wants an additional 6 billion U.S. dollars. Chrysler has been living on 4 billion dollars in government loans.

 

As part of the talks, Chrysler and the US Treasury Department were preparing paperwork for bankruptcy filings, one as a reorganization in Chapter 11 with government funding and the other as a liquidation if no government money is available, sources in the U.S. said. Chapter 11 bankruptcy frees a company from the threat of creditors' lawsuits while it reorganizes its finances. The debtor usually retains control of the business and its assets.

 

Under terms of the deal, Fiat would take a 20-percent stake of Chrysler in exchange for giving small-car and other technology that would help widen Chrysler's palate of fuel-efficient cars. Fiat would also help with management support and entry into the European market. Marchionne has been firm that Fiat is not willing to put up cash for equity, and that it would not take on Chrysler's debt.

 

Fiat wants to build the small cars at Chrysler factories in the US, but the vehicles would probably not arrive before early 2011, Fiat has said.

 

Fiat is also reportedly in talks to take on General Motors' European operations, which include Germany's Opel, according to German officials. However, Marchionne said last week there were no talks to his knowledge.