The shutdown is effective Monday and could last up to two months.
Auburn Hills, Mich.-based Chrysler LLC says it expects the shutdown to last between 30 and 60 days and then resume with normal production schedules once the agreement is completed.
Chrysler's hope to avoid bankruptcy proceedings was thwarted after negotiations with hedge funds holding a minority stake in the automaker's outstanding debt collapsed early Thursday morning.
In announcing the plans to enter Chapter 11 bankruptcy protection, Mr. Obama said he has "every confidence that Chrysler will emerge from this process stronger and more competitive."
Mr. Obama said the deal with Fiat will give the automaker a "new lease on life."
Fiat Group SpA will get a 20 percent stake in Chrysler in return for giving Chrysler access to its fuel-efficient technology.
Fiat has committed to building Fiat cars in Chrysler factories, to be sold as Chryslers.
Soon after Mr. Obama spoke, Chrysler CEO Robert Nardelli announced thatafter the company emerged from bankruptcy protection.