A federal bankruptcy judge in New York has approved the sale of most of U.S. automaker Chrysler LLC's assets to Italy's Fiat SpA.

Arthur Gonzalez said in a filing in U.S. Bankruptcy Court late Sunday that he approved the sale, the major piece of a plan orchestrated by a federal auto task force.

The approval will allow Chrysler to sell its assets, including factories and dealerships, to a newly formed incarnation of itself, Chrysler Group.

The plan gives a 55 per cent stake of the new company to a union-run trust for retirees, a 20 per cent stake to Fiat that can ultimately grow to 35 per cent, and smaller stakes to the U.S. and Canadian governments.

The decision comes following three days of testimony during hearings in New York last week.

In his 47-page decision, Gonzalez said the only alternative to approving the sale was the immediate liquidation of the company.

"Indeed, because of the overriding concern of the U.S. and Canadian governments to protect the public interest, the terms of the Fiat transaction present an opportunity that the marketplace alone could not offer, and that certainly exceeds the liquidation value," Gonzalez's ruling says.

Chrysler LLC was forced into court protection on April 30.

Pension, construction funds oppose asset sale

Some of the strongest opposition to Chrysler's asset sale came from lawyers representing a pair of Indiana state pension funds and a state construction fund that hold a combined $42.5 million of the company's total $6.9 billion in secured debt.

The funds have said they oppose the sale because it puts the interests of unsecured creditors, such as the United Auto Workers union, ahead of theirs and those of other secured debt holders. But the funds hold less than one per cent of Chrysler's secured debt.

Chrysler entered bankruptcy protection with a handful of new vehicles in the works. It plans to begin selling an electric car and have six electric vehicles on the road by 2014.

Fiat, which makes cars under the Fiat, Lancia, and Alfa Romeo brands, has been eyeing entry into the U.S.

Fiat is expected to bring a handful of its small cars to the U.S. in the coming years.

The sale to Fiat means Chrysler could be out of bankruptcy within the government's original timeframe of 30 to 60 days.

The approval of the $2-billion US sale of the assets to the new company also came just hours before General Motors Corp. filed for bankruptcy.

With files from The Associated Press