Still, Chrysler faces 2009 with a critical cash shortage, limited fuel-efficient offerings, a model lineup that is not selling well and a two-year wait for the Fiat partnership to bear fruit.
"There's a substantial interim period here. You're not going to see Fiat-designed Chrysler products for at least 24 months," said Michael Robinet, vice president of global forecast services for Northville, Mich., auto consultancy CSM Worldwide.
Fiat Group SpA has far better products and is much more attractive to foreign automakers than in 2005, when General Motors Corp. paid $2 billion to get out of a partnership that could have forced it to buy the Italian company.
At that time, Fiat had $10.4 billion in debt and a lack of successful new models. But Robinet said its models are now competitive, and even though its sales are down this year, Fiat is expected to report selling just over 2 million vehicles worldwide when it releases 2008 sales figures.
"We're not talking about your grandfather's Fiat here," Robinet said. "They really are one of the premier small car builders in the world."
The deal may also help Chrysler LLC prove that it can become competitive, in order to get another $3 billion in loans from the federal government. The companies said the Fiat deal will be part of the viability plan Chrysler must submit to the Treasury Department by Feb. 17.
The department would have to approve any deal under the terms of the $4 billion it loaned to Chrysler earlier this month.
"While Fiat will not provide a cash equity injection, its willingness to dance with Chrysler may provide Washington just enough cover to lend Chrysler additional funds," JPMorgan analyst Himanshu Patel wrote in a note to investors.
But some observers had doubts. Standard and Poor's analysts Robert Schulz and Gregg Lemos Stein cautioned investors Tuesday that a Chrysler-Fiat partnership alone was unlikely to ease Chrysler's cash crisis.
Also, if the Fiat deal goes through, foreign automakers would own roughly 55 percent of Chrysler, making aid from the federal government a bit sticky from a political standpoint. New York private equity firm Cerberus Capital Management LP acquired 80.1 percent of Chrysler for $7.4 billion in 2007 as Daimler dissolved the 1998 "merger of equals" between Daimler-Benz and Chrysler.
A sale of all or part of the Daimler's remaining 19.9 percent stake is highly possible to make sure Chrysler remains mostly U.S.-owned, said Aaron Bragman, an auto analyst with the consulting company IHS Global Insight.
It is likely that part of Fiat's stake will come from Daimler's remaining share in the company. Daimler has written down the value of its stake to zero.
"Daimler welcomes any initiative which enables Chrysler to stabilize its situation and to secure jobs in the company," spokesman Thomas Froehlich said. "It is still our intention to dispose of our 19.9 percent stake in Chrysler."
Fiat's stake could be expanded beyond 35 percent, although Chrysler spokesman David Elshoff would not say if either company had a specific number in mind. The companies' agreement is nonbinding at this point, but they hope to have a final agreement by April, Elshoff said.
A joint statement issued by the companies stressed that the Turin-based Fiat was not committing to funding Chrysler in the future.
CreditSights analyst Brian Studioso said Fiat, which has its own challenges this year from continued drops in car and truck production, is not in a position to part with cash.
In December, the drop in demand in its key Italian market forced Fiat to shut most of its plants in the country for a month, laying off nearly 50,000 workers for an extended holiday.
Chrysler also shuttered all 30 of its factories for a month in December and January in reaction to slow U.S. sales, which fell 30 percent last year to about 2.1 million vehicles, including a 53 percent plunge in December.
Fiat would be a great help to Chrysler with subcompact and compact cars, a fast-growing segment of the U.S. market in which Chrysler has never really been competitive. Fiat, which tried to enter the U.S. market in the 1970s but pulled out, has moved beyond the subpar vehicles it tried to distribute here, Robinet said.
For example, the Fiat 500 two-door hatchback, a car smaller than a Mini Cooper but larger than a Smart fortwo, competes well in Europe, he said.
Chrysler could also distribute Fiat-owned Alfa Romeos through its 3,300 Chrysler, Jeep and Dodge dealers, Bragman said.
Chrysler's design and engineering teams could design new bodies and interiors to be placed atop Fiat underpinnings, giving Chrysler relatively quick access to high-quality small cars, Bragman said.
Elshoff said a deal for Nissan Motor Co. to build a subcompact for Chrysler in 2010 for distribution in the U.S. is still in effect. Although the Nissan offering, to be called the Hornet, could conflict with future Fiat products, Elshoff said consumers would benefit by having more choices.