Chrysler LLC said on Friday that Italy's Fiat SpA would not assume any of its debt under a proposed alliance between the automakers, backing down from a claim it had made just a day earlier in a bid to bolster support for the deal.

Chrysler on Thursday had said Fiat would assume 35 percent of its debt to the U.S. government under the terms of the proposed alliance. Fiat flatly denied the assertion.

The U.S. automaker, which has received $4 billion of U.S. government emergency aid and has sought another $5 billion of loans, has less than two weeks to meet requirements for the crucial loan program, including a demonstration that it can be a viable company over the long term.

Chrysler executives have said the alliance with Fiat would represent billions of dollars in value for the U.S. automaker, taking into consideration the typical development costs for new vehicles. Fiat would receive a 35 percent stake in Chrysler under the proposal but would not pay any cash.

Fiat would become an equity holder with the same rights and responsibilities as all other equity holders in a newly restructured company, Chrysler said in a statement.

To clarify, this does not mean Fiat would assume responsibility for any of Chrysler LLC's debt, it said.

A video message on Chrysler's media website on Thursday had said Fiat would take on 35 percent of Chrysler's debt to the U.S. government, but would not receive money from that pool.

In response, Fiat said it intends to make it absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness of Chrysler.

Fiat shares had slumped more than 4 percent following the initial reports on the debt. The shares closed Friday down 2.28 percent at 4.61 euros, while the DJ Stoxx auto index <.SXAP> was down 1.13 percent.

VIABLE CONCERN

The proposed partnership comes as the car industry is struck by the worst crisis in decades. It would help Fiat gain the scale it needs to stay profitable, while Chrysler would gain crucial smaller vehicles to help it stay in business.

Chrysler has until March 31 to prove to the U.S. government that it can remain a viable concern and deserves to maintain the current loan and to receive additional funding. The proposed partnership with Fiat depends on Chrysler getting that money.

In a nonbinding agreement, Fiat would take a 35 percent stake in Chrysler in exchange for the technology to make small cars, as well as access to foreign markets.

Fiat would not pay cash for the stake in Chrysler, which is about 80 percent controlled by private equity firm Cerberus Capital Management LP .

Still, analysts expect Fiat to end up investing something in the partnership in the coming years.

Nothing is free in this world, said Arndt Ellinghorst at Credit Suisse.

Commerzbank's Gregor Claussen said: It will have to invest because Chrysler plants are not made for Fiat cars.

Chrysler has said the partnership would be worth up to $10 billion for Chrysler and could preserve 5,000 manufacturing jobs in North America.

(Additional reporting by Soyoung Kim in Detroit, Editing by Andrew Macdonald and Gerald E. McCormick)

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