Fiat still wants to pursue an alliance with Chrysler if the U.S. automaker is forced to file Chapter 11 bankruptcy protection from creditors, a source close to the Turin-based automaker said Monday.

Fiat Group SpA is continuing talks to reach a deal by the Thursday deadline, the source said. Fiat CEO Sergio Marchionne was in the United States 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 labour costs by April 30 if it wants an additional $6 billion US. Chrysler has been living on $4 billion in government loans.

As part of the talks, Chrysler and the 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 United States have 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 per cent stake of Chrysler in exchange for small car and other technology that will help widen Chrysler's palate of fuel-efficient cars, as well as management support and an entree into the European market. Marchionne has been firm that Fiat is not willing to put up cash for the equity, and that it would not take on Chrysler debt.

Fiat wants to build the small cars at Chrysler factories in the U.S., but they likely wouldn't arrive before early 2011, Fiat has said.

Fiat also reportedly is in talks to take on General Motors' European operations, which includes Germany's Opel, according to top German officials. Marchionne last week told analysts there were no direct talks to his knowledge.