Italian car group Fiat has signed a preliminary partnership deal with the American manufacturer Chrysler.
Under the agreement Fiat will take a 35% stake in Chrysler. In return, Chrysler will get access to Fiat's fuel-efficient vehicle technologies.
The BBC reports it is hoped the agreement will lead to "substantial" savings for Chrysler.
The United Auto Workers union welcomed the deal, saying it could help preserve US manufacturing jobs.
Chrysler has received an emergency loan from the US government worth $US4 billion, while Fiat has said it needed a partner because it was too small to continue on its own.
The BBC reports the completion of the deal is subject to approval from regulatory authorities, including the US Treasury.
Trading in Fiat shares was earlier suspended amid speculation of a possible partnership with the US company.
Fiat shares rose 3.5% when trading resumed after the announcement.
Also on Tuesday, German carmaker Daimler said it was still interested in selling its 20% stake in Chrysler.