Fiat took a giant step on Thursday to becoming one of the biggest automakers in the world with a $1.3-billion (889-million-euro) deal to boost its stake in Chrysler to 46 percent.
Fiat said the deal would be completed during the second quarter of this year and would involve billions of dollars in loans given to Chrysler by the US and Canadian governments during the economic crisis being "fully repaid".
"This is a fundamental step toward completion of the momentous integration of Fiat and Chrysler initiated less than two years ago," Fiat chief executive Sergio Marchionne, who also heads up Chrysler, said in a statement.
The deal "will result in the creation of a global automaker," he said.
The Italian automaker also said on Thursday it expected to increase its stake by a further five percent to 51 percent "before year end."
The aim, Fiat said, was the creation of an auto giant with "the determination to establish itself as a leader in the sector."
Fiat took over management of the iconic US company after it emerged from bankruptcy in 2009 and currently owns a 30-percent stake. Chrysler suffered from an implosion of sales for the auto sector in the United States.
Investors welcomed the news, with Fiat's share price on the Milan stock exchange rocketing up 3.80 percent to 6.825 euros during trading.
But Italy's Fiom trade union said the deal was "bad news" for Italy.
"Everything will be sacrificed in Italy to find money for the takeover and this will signal the end of independent auto production in the country," Giorgio Cremaschi, head of the powerful Fiom union, told reporters.
Chrysler confirmed the deal, saying that "Fiat has agreed with Chrysler Group's other members that it will exercise its option" to increase the stake.
The other shareholders are the US and Canadian governments and the pension fund of the AUW union based in Detroit at the hear of the US auto industry.
At the end of 2010, Chrysler owed the US government $5.8 billion and $1.7 billion to the Canadian government and the province of Ontario.
Chrysler is set to raise around seven billion euros in debt on the markets.
Fiat, which announced its first-quarter profits on Wednesday, said it had chosen to "accelerate the pace" of the merger. Analysts said the financial time was right ahead of a planned listing of Chrysler at the end of 2011.
"Fiat, together with Chrysler, will create a stronger automobile group, with a full range of products, present in every market around the world and able to compete with the best," the Turin-based company said.
Fiat and Chrysler combined have a production volume of about four million vehicles a year, which should be increased to six million by 2014 -- putting the combined company among the top auto makers in the world.
Toyota was the world's biggest car maker last year with total sales of 8.418 million vehicles. General Motors produced 8.39 million.
"The transaction that we are announcing today represents a historic step for Fiat and Chrysler," Fiat chairman John Elkann, grandson of Fiat's historic boss Gianni Agnelli for decades, said in a statement.
Fiat began managing Chrysler in June 2009 with a 20-percent stake.