The partnership is the last piece of a huge restructuring plan needed to keep Chrysler alive as it approaches Thursday's government deadline to cut labor costs, slash debt and take on a partner.
The people said Wednesday that despite the partnership, Chrysler could still wind up under Chapter 11 bankruptcy protection for a short time if some creditors don't agree to reduce their debt. But they said the government would agree to finance the restructuring rather than cut off Chrysler's aid and leave it destined for liquidation.
All of the people spoke on condition of anonymity because the partnership agreement had not been announced.
One of the people said Fiat initially would take a 20 percent stake in the company in exchange for its small-car and engine technology. Initially Fiat would not invest any cash, but its technology is worth $8 billion to $10 billion, the person said.
Fiat's stake could rise to 35 percent, and the company may be willing to invest money at a later date, the person said.
President Barack Obama, speaking at a town-hall style event near St. Louis, said earlier Wednesday that he didn't know if a deal to save Chrysler would be completed.
"We're hoping that you can get a merger where the taxpayers will put in some money to sweeten the deal but, ultimately, the goal is we get out of the business of building cars, and Chrysler goes and starts creating the cars that consumers want," he said.
Chrysler has borrowed $4 billion from the government since the beginning of the year and could soon be in danger of running out of cash without more help. The government in March rejected Chrysler's restructuring plan and gave it 30 days to make another effort.
On Sunday, the Canadian Auto Workers ratified concessions to the automaker, and the United Auto Workers in the U.S. reached a tentative cost-cutting deal that members will finish voting on by Wednesday night. Factory-level union leaders voted unanimously Monday night to recommend approval of the concessions.
Then on Tuesday, four major banks that hold 70 percent of Chrysler's $6.9 billion in secured debt agreed to a deal that would erase the debt for $2 billion in cash. But 46 hedge funds that hold the remainder of the debt have refused to go along, leading to further negotiations.
The people familiar with the deal said that if the hedge funds don't agree, Chrysler could go into a short "surgical" bankruptcy under Section 363 of the bankruptcy code. The smaller lenders would have little power to stop the debt from being restructured in bankruptcy court, since the lenders holding the majority of the debt are on board with the plan, the people said.
If an agreement is reached, Chrysler would restructure outside of bankruptcy with government help, they said.
Fiat spokesman Gualberto Ranieri declined to comment on the deal, and messages were left with a Chrysler spokeswoman.
UAW members are expected to approve the contract concessions, which include taking a 55 percent stake in Chrysler in exchange for about $6 billion of the $10.6 billion Chrysler must pay into a union-run trust that will take over retiree health care costs.
With union issues nearly out of the way and the debt resolved either in or out of court, Fiat agreed to cement the partnership with Chrysler, the people said.
"It'll be signed by tomorrow, I know that," one of the people told The Associated Press.