The Obama administration urged the U.S. Supreme Court on Monday to allow the sale of bankrupt automaker Chrysler LLC to a group led by Italian carmaker Fiat SpA, saying that blocking the deal would have grave consequences.

Solicitor General Elena Kagan of the U.S. Justice Department, the administration's lawyer before the high court, said in a written argument that a bid by three Indiana pension funds to block the sale could force Chrysler's liquidation.

A U.S. appeals court in New York on Friday approved the sale of most of Chrysler's assets to a group led by Fiat, a union-aligned trust and the U.S. and Canadian governments.

But the appeals court delayed the closing of the sale until 4 p.m. on Monday or until the Supreme Court denies any stay request -- whichever comes first.

The Chrysler case could set a precedent for General Motors Corp, which is using a similar quick-sale strategy in its bankruptcy in New York.

The Indiana pension funds argued that the sale of Chrysler unlawfully rewards unsecured creditors ahead of secured lenders and amounts to an illegal reorganization plan, and that the U.S. Treasury Department overstepped its legal authority by using bailout funds for Chrysler when Congress intended the money for banks.

Kagan defended the use of the bailout funds and said granting a stay beyond June 15 would jeopardize the sale. Fiat can walk away from the deal if it does not close by June 15.

The liquidation of Chrysler would have very severe effects on the American and Canadian economies, she said.

More than 38,000 Chrysler employees would lose their jobs; 23 manufacturing facilities and 20 parts depots will be shuttered; more than 3,000 Chrysler dealers would suffer significant and possibly fatal harm to their businesses; and billions of dollars in health and pension benefits for current and former Chrysler workers would be wiped out, she said.

The Supreme Court could act on the stay request at any time.

(Reporting by Jim Vicini; Editing by John Wallace)

Chrysler Sale