Fiat SpA's five car factories in Italy are all in the red and its profits now driven squarely by U.S. affiliate Chrysler, meaning a further scaling back of its 100-year-old Italian operations -- if not a complete pullout -- now looks increasingly likely.

The company's quixotic chief executive Sergio Marchionne says it would be unthinkable for the company not to have the interests of its 80,000 employees and its homeland at heart.

But as Italy gets sucked ever deeper into the debt crisis engulfing the whole euro zone and Fiat suffers an Italian market at its lowest ebb in 15 years, a revamped Chrysler is now the main source of revenues and profits for the combined group.

Economically, financially, Fiat is already out of Italy, said an investment banker who follows the company.

A full-blown merger is expected by 2014 and the group's centre of gravity is shifting inexorably towards the United States.

In the third quarter, two-thirds of the group's profits -- seen at more than 2.1 billion euros for the whole of 2011 -- came from Chrysler. By contrast, Italy now represents less than 15 percent of consolidated revenues from as much as a third before the Chrysler tie-up.

On Friday Marchionne said he expected 2012 to be another difficult year for the auto market in Italy, where Fiat's sales have shrunk by 210,000 units in the last four years, but added that the U.S. market, and Chrysler, were performing very well.

Analysts estimate that Fiat loses around 1 billion euros a year in its home base, and Marchionne said last year that the group would perform better without Italy.

A top Milan broker said: Our perception is that a significant downsizing of the business in Italy is a distinct possibility.

That prospect can hardly please the new emergency government led by Mario Monti, who is trying to pull Italy back from the brink of financial disaster by pushing through unpopular austerity measures.

LABOUR ROW

Marchionne blames low productivity, high labour costs and rigid work contracts for the group's losses on its home turf, and has engaged in a tug-of-war with unions and Italy's industrial elite to overhaul labour agreements.

The 22,000 employees in Fiat's five main Italian car factories produce 650,000 cars a year, compared with the 600,000 that are rolled out at Fiat's single Polish plant, which employs just 6,000 people.

Last month, Fiat said it would scrap industry-wide national labour contracts to replace them with deals at the plant level setting tougher rules for working hours, sick pay and strikes -- a move which labour experts say marks a turning point in Italy's industrial relations.

The group had already announced its exit from employers' group Confindustria, arguing that collective labour deals negotiated between the confederation and unions put it at a competitive disadvantage on the international stage.

And, in a sign of the widening gulf between Marchionne and Italy's establishment, Fiat rebuffed a formal request by market watchdog Consob to explain its domestic investment and production plans -- saying it was unable to provide the information.

In a country where every Fiat move is watched closely for possible signs that its commitment to Italy may be waning, Marchionne's mercurial style has startled labour groups, politicians and business leaders alike.

It has also put Fiat on a collision course with the country's biggest metalworkers union, FIOM, which has already taken the group to court over changes to labour deals and now threatens a general strike.

FIOM accuses Marchionne of reneging on pledges to invest 20 billion euros in Italy by 2014 and using the row over labour deals as a pretext to scale back its Italian operations.

The controversy only deepened this week, when the transcript of a radio interview on Thursday wrongly quoted Marchionne as saying we can leave Italy on the day the group handed its Sicilian plant of Termini Imerese over to a local businessman for the symbolic price of one euro.

Fiat denied that Marchionne had ever made the remark, and the radio issued a corrected transcript removing all reference to the comment. But that did little to dispel concerns that Marchionne will make good on his threat to shift production abroad if he does not win full union support.

While the relocation threat may be a negotiating tactic, Fiat cannot ignore the fact that the value of its Milan-listed shares has nearly halved since the start of the year and Italy is likely to plunge into recession in 2012 -- not to mention the spectre of a default.

(Additional reporting By Stephen Jewkes; Editing by Sophie Walker)