TURIN, Italy (Reuters) - Fiat SpA is in talks with Chrysler LLC over a possible stake in the struggling U.S. automaker, a source close to the Italian group said on Monday.

A worker stands behind a Fiat Ducato vehicle at a production line Russia, May 27, 2008. IREUTERS/Denis Sinyakov

“Between the two groups, there is talk about Chrysler possibly using Fiat technology in exchange for a stake,” a source told Reuters, speaking on condition of anonymity.

The source told Reuters a deal with Fiat would help Chrysler make vehicles that produce fewer harmful emissions.

“To get financing, U.S. (car makers) have to show that they are really committed to developing over the short term a new family of vehicles that pollute less,” the source said. “By itself, Chrysler would not be able to meet this condition.”

The talks between Fiat and Chrysler were reported by auto industry publication Automotive News Europe earlier in the day on its website (www.autonews.com).

The publication cited unnamed sources as saying Fiat could take a stake of up to 35 percent in Chrysler and give the U.S. automaker access to platforms, engines and transmissions.

Chrysler, the No. 3 U.S.-based automaker behind General Motors Corp and Ford Motor Co received $4 billion of U.S. government loans to avert collapse and Chief Executive Bob Nardelli said last week it was counting on $3 billion more.

It had requested $7 billion of U.S. government aid.

GM, which also received government money, and Chrysler are required to meet cost-cutting targets as a condition of the aid, including reducing labor costs and restructuring debt as well as demonstrating that they have plans to be viable.

“In today’s economic environment, talks are going on between companies in all industries -- ours is no different,” Chrysler said in a statement in response to the reports of talks between the automaker and Fiat.

“Chrysler LLC as a matter of policy however, does not confirm or disclose the nature of its private business meetings,” the automaker said. “Beyond those partnerships and alliances already announced, Chrysler has no further announcements to make at this time.”

Chrysler owner, Cerberus Capital Management, declined to comment on the report. A Fiat representative was not immediately available for comment.

BET ON CHRYSLER’S FUTURE

In an interview with Automotive News Europe in December, Fiat Chief Executive Sergio Marchionne said Fiat was too small to survive the world auto crisis alone and needed a partner to provide enough production volume to be profitable.

One London-based analyst said scale was probably the reason behind Fiat’s interest in Chrysler, despite the U.S. automaker’s desperate situation.

“This is a bet that Chrysler in some form will exist” in the future, he said on condition of anonymity.

Apart from Ferrari and Maserati, Fiat does not sell cars under its three other brands in the United States.

Before the global downturn in car sales, Fiat had talked with the three U.S. automakers about using some of their idle production lines to make a return to the U.S. market.

A second London analyst said the stake Fiat could take in Chrysler would likely be a token 5 percent. Fiat would probably use Chrysler’s dealership network to sell small cars, something lacking in Chrysler’s product portfolio, the analyst said.

Although Chrysler denies positioning itself for a sale, it has been in talks with other manufacturers. It said last week it hoped to sell equipment used to make one of its models, the PT Cruiser, which is being phased out this summer.

Seen as the weakest of the Detroit manufacturers, analysts have questioned whether Chrysler can survive without a partner. Most of its sales are in the U.S. market, where Chrysler posted a 30 percent drop last year.

Chrysler burned through $9 billion cash in the second half of 2008 to end the year with $2 billion in cash. It shut all of its U.S. plants for a month from mid December and said last week that some of the shutdowns would be extended.

Fiat and other car makers also have been halting production to lower their inventories of unsold vehicles.