WASHINGTON - Chrysler Group LLC would need time to find a permanent and stable replacement for providing auto loans if it loses access to bank financing it shares with General Motors Co, Chrysler Chief Executive Sergio Marchionne said on Thursday.

Marchionne made the comment after updating Michigan lawmakers on Capitol Hill where he also expressed the need for expanded manufacturing capability in the United States, according to a member who attended the meeting.

He reported that the painful restructuring of the company that we have all experienced is beginning to pay dividends, said Representative Candice Miller.

Chrysler, which restructured in bankruptcy last year, is now run by Marchionne-led Fiat of Italy.

Marchionne told reporters that Chrysler would need a stable option for auto financing, if GM buys out or becomes formally affiliated with the financing business of Ally Financial, its old GMAC unit.

Sources with knowledge of the deliberations said this week that GM is considering a return to captive financing for new car purchases and leases. One option would have GM acquire Ally's auto loan business.

Captive financing, or loans arranged by dealers with lending options affiliated with automakers, factors into most car purchases in the United States.

Once they tell me that GMAC is going back into General Motors, we need to have the time, the space to find an alternative solution to the long-term future of Chrysler, Marchionne said.

One of the things we do not wish under any circumstance is to have an uncompetitive relationship vis-a-vis GM, Marchionne said.

Detroit-based GMAC, now known as Ally Financial, is 56-percent owned by the U.S. Treasury after the government injected $17 billion as part of a restructuring that also saw the finance company become a commercial bank.

GM and Chrysler were placed under the car loan umbrella now run by Ally during their government-financed restructurings last year. The Treasury owns 60 percent of GM and nearly 10 percent of Chrysler.

Separately, Miller said Marchionne expressed in their meeting a need for expanding U.S. production capacity. She said Chrysler's decision to repurchase the Sterling Heights, Michigan, assembly plant from assets left behind in bankruptcy is a hopeful sign for the state and the company.

Miller said Marchionne made no long term commitment for production at Sterling Heights but told lawmakers the facility was part of the company's future plans.

Sterling Heights turned out the Chrysler Sebring and Dodge Avenger sedans and its repurchase was a victory for the United Auto Workers, which owns 55 percent of Chrysler.

Separately, Chrysler said this week it would invest $43 million to expand capacity at Indiana powertrain facilities that support vehicles including the Sebring and Avenger.

As part of Chrysler's 2009 bankruptcy restructuring, the Obama administration gave Fiat a 20 percent stake in Chrysler in exchange for bringing smaller vehicles and more fuel-efficient engines to the U.S. automaker.

(Reporting by John Crawley; Additional reporting by Bernie Woodall and Soyoung Kim, editing Bernard Orr)

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