A growing team of Fiat SpA executives and engineers has been working at Chrysler's Detroit-area headquarters this week, finalizing plans to cut costs and ready the Fiat 500 small car for the U.S. market, people with knowledge of the work said.

Fiat Chief Executive Sergio Marchionne, who is expected to take over operational control at Chrysler, has been leading the team from the Italian automaker, according to the sources who asked not to be named because a deal to merge the two companies under Marchionne has not been cleared by U.S. courts.

A Chrysler spokeswoman was not immediately available for comment. Fiat had no comment.

A federal appeals court will hear arguments from three Indiana state pension funds looking to block the sale of most of Chrysler's assets to a group led by Fiat on Friday.

Chrysler has been operating in bankruptcy with the backing and financing of the U.S. Treasury since April 30.

The plan brokered by the White House-appointed autos task force is for the United Autos Workers union to take 55 percent of a reorganized Chrysler in a deal that has been on track to close this month.

The U.S. government and Canadian government would hold a combined 10 percent stake.

Fiat would obtain 20 percent of Chrysler in exchange for bringing its small-car technology and management to the U.S. automaker. Fiat's stake would rise to 35 percent over time as it meets benchmarks in the company's turnaround.

But in advance of the closing of the Chrysler deal, Marchionne has been leading an effort involving several dozen executives from Italy intended to drive cost savings on parts purchasing and to smooth the way for the introduction of the Fiat 500 to the U.S. market.

Smaller than a Mini, the 500 is expected to get more than 40 miles per gallon (17 km per liter) as measured by U.S. regulatory standards.

Named Europe's car of the year for 2008, the 500 was the centerpiece of Fiat's pitch to U.S. officials that it could help reinvent Chrysler and move it away from its reliance on heavier trucks and minivans.

Plans are for the 500 to be brought over to Chrysler's U.S. dealers 18 months after the work on readying it to meet U.S. safety standards began, the people with knowledge of the effort said. That aggressive timetable is intended to bring the 500 to U.S. showrooms by the end of 2010.

The plan is for the 500 to be the first new product introduced by Chrysler under the still-pending deal with Fiat, the sources said.

In April, before Fiat had sealed a deal to take its controlling stake in Chrysler, Jim Press, Chrysler's vice chairman, was promoting the 500 by driving one onstage for his appearance at a news conference for the New York auto show.

Press, speaking to reporters on Wednesday in Washington, said work had already begun to produce a range of new vehicles based on Fiat vehicle architectures and powertrains.

A separate team of Fiat engineers has been working with Chrysler to examine plans for vehicles still in development part by part to see where the two companies can begin to share components to bring down costs, sources said.

One potential complication of that effort is the deep drop in Chrysler sales this year.

Chrysler's 2008 sales were near 2 million vehicles, which, combined with Fiat's 2.2 million vehicle sales, would have created a combined automaker with global sales near Hyundai Motor Co <005380.KS>, projections prepared by Fiat showed.

But Chrysler's sales in the United States have plunged by 46 percent through the first five months of the year. That is a problem because the U.S. automaker has relied on the U.S. market for almost 90 percent of its overall sales.

Auto suppliers have been hurt by the sharp decline in industry production volume. In a further blow, Chrysler opted to shut down all of its factories during its bankruptcy.

Restructuring advisers and analysts have said many of the smaller and privately held suppliers could face a cash crunch as auto production picks up and they are asked to bring workers back and restart plants.

Our production for our company will start by the end of June. For all of our parts, Chrysler's Press said on Wednesday.

(Additional reporting by John Crawley in Washington and Gilles Castonguay in Milan, editing by Matthew Lewis)

Chrysler