The U.S. Supreme Court is weighing whether to allow the Obama administration-backed sale of bankrupt automaker Chrysler LLC to a group led by Italian automaker Fiat SpA.

Indiana pension funds and consumer groups had asked the Supreme Court on Sunday to stop the sale of Chrysler to Fiat while they challenge the deal.

The separate requests, which moved the legal battle to the nation's highest court, were filed after a U.S. appeals court in New York approved Chrysler's sale to a group led by Fiat, a union-aligned trust and the U.S. and Canadian governments.

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

It is unclear what would happen if the Supreme Court does not act before 4 p.m.

The Obama administration, earlier on Monday, urged the Supreme Court to allow the sale, 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.

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.

NEW COMPANY SET TO BE FORMED

Chrysler filed for bankruptcy protection on April 30 to complete the sale and alliance with Fiat within 60 days, in a case that analysts have seen as a test for the much bigger and more complex bankruptcy of GM.

The $2 billion sale of Chrysler's assets to a new company that will be 68 percent controlled by a healthcare trust aligned with the United Auto Workers union was approved by a U.S. bankruptcy judge on June 1.

Fiat will control 20 percent, the U.S. and Canadian governments will control the other 12 percent.

Brad Coulter, restructuring expert at O'Keefe & Associates, said the new company to emerge from the sale will face the same problems it had before entering bankruptcy.

They still need to refreshen their product line-up, and they're still facing an extremely depressed U.S. market, O'Keefe said. The question is after shedding debt and costs, will they still be burning cash under these market conditions?

(Reporting by Jim Vicini, Soyoung Kim and Poornima Gupta; Editing by John Wallace and Tim Dobbyn)

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