Fiat chief executive Sergio Marchionne said the agreement would be a good basis for further co-operation with Chery, the mainland's fourth-biggest carmaker by sales.

Chery spokesman Wang Wei said Mr Marchionne had approached the company for co-operation such as a joint venture but Chery had not yet expressed its intentions.

Mainland carmakers such as Geely Automobile Holdings and Chery are gearing up to tap market share in Western Europe and United States as success in mature markets can boost the image of their vehicle brands in the domestic market.

Chery is set to become the first mainland carmaker to sell vehicles in the US by developing, assembling and distributing small and subcompact cars, according to an agreement sealed early last month.

The company has set a target to sell 390,000 units this year, with 70,000 units for export. The company last year reported sales of about 310,000 units, including 40,000 units sold overseas.

For Fiat, co-operation with Chery could help turn around its sagging business in the mainland after 10 years of a disappointing tie-up with the oldest domestic carmaker, Nanjing Automobile Group.

Nanjing Fiat, which produces models such as Perla, Palio, Siena and Weekend, sold about 300,000 units last year.

It did not disclose comparative figures.

Nanjing Auto has focused on its self-branded car business with the assets and technology acquired from the defunct British carmaker MG Rover in 2005.

Mr Marchionne had said that Fiat was being 'ignored' by Nanjing Automobile, which made it difficult for the company to revive its mainland business.

Fiat planned to boost its investment in the mainland to 16 billion yuan in 2010, its mainland head Franco Amadei earlier told the mainland media.

Revving up

Chery Automobile will build 1.6-litre and 1.8-litre engines for Fiat cars

Number of petrol engines Chery Automobile will supply to Italian firm: 100,000