Fiat SpA will pay $1.27 billion euros for an additional 16 percent stake in automaker Chrysler this quarter, raising its stake to 46 percent in a deal that was faster and cheaper than expected.

The purchase takes Fiat a big step closer to its target of owning 51 percent of the Detroit automaker, control that Chief Executive Sergio Marchionne defined on Wednesday as happiness for Italy's largest industrial group.

Fiat, Europe's No. 6 automaker by market share, said on Thursday it had reached agreement with Chrysler and its other shareholders to exercise an option to buy the 16 percent stake in the second quarter.

The option would be exercised when Chrysler's $7 billion debt with the U.S. and Canadian governments is repaid, it said.

Fiat already owns 30 percent of the Big Three U.S. automaker and expects to add another 5 percent by the end of 2011 as it reaches a performance goal, it said.

Three sources familiar with the issue said last week Fiat was looking to pay around $1.5 billion for the stake and the deal would be closed in coming months.

KEY FOR IPO

Securing majority control is key for Fiat's plans for a Chrysler initial public offering (IPO). The listing had been planned for the second half of 2011 but could be pushed into 2012, a possibility Marchionne raised in late March.

They're moving faster than expected as they want to consolidate their (financial) statements before the IPO, said an auto analyst who declined to be named. The option price seems absolutely fair as the consensus on the value of Chrysler is around $8 billion.

The analyst said Fiat would reap a 30 percent capital gain if Chrysler's value reached, as expected, $10 billion or $11 billion after its listing.

That would mean a capital gain of between 0.8 and 0.9 euro for each Fiat share, the analyst said.

Citigroup Inc is the adviser on the Chrysler stake purchase.

Marchionne, who has made Fiat one of Europe's top turnaround stories, sees Chrysler as crucial to elevating Fiat to a global player. The Italian company closed a deal to take control of the stricken U.S. car maker in June 2009.

Marchionne, who is top executive at both Fiat and Chrysler, said on Wednesday he did not expect damage to Fiat's credit rating from purchase of the 16 percent stake. The Italian group is planning to pay for it with its own cash.

Shares in Fiat were up 2.8 percent at 6.76 euros by 0902 GMT. The STOXX Europe 600 autos index was up 0.1 percent.

Fiat on Wednesday posted a first-quarter trading profit of 251 million euros, slightly ahead of the median forecast. Fiat also lowered its net industrial debt, bucking expectations of a debt rise.

(Additional reporting by Valentina Za; Editing by David Holmes)

Chrysler