Chrysler LLC rushed to clinch a deal on Thursday to stave off collapse ahead of a midnight deadline imposed on the No. 3 U.S. automaker by the Obama administration.

As of Thursday morning, Chrysler still had not gained the bondholder support it needs to move forward with a restructuring and avoid the first-ever bankruptcy filing by a Big Three U.S. automaker.

The ailing company is seeking a rescue deal from Italy's Fiat and a debt forgiveness agreement from its lenders.

Signals about the discussions with Fiat were mixed. The Italian newspaper Corriere Della Serra reported Thursday morning that a deal had been signed, but Fiat later denied this.

While getting a Fiat deal done is crucial, bondholders still hold the key.

In a memo to employees obtained by Reuters, Chrysler Chief Executive Robert Nardelli said reaching an agreement with lenders was the company's main focus.

I think there is reasonable optimism that (a deal between Fiat and Chrysler) can be closed, with an announcement perhaps even by President (Barack) Obama today, Italian Industry Minister Claudio Scajola told Italian television on Thursday.

Chrysler, majority-owned by Cerberus Capital Group , is among the car industry's laggards, but its plight reflects a slump in demand facing an industry whose $2.6 trillion annual revenue is equivalent to the GDP of France and which employs over 9 million people.

Italian newspaper Il Sole 24 Ore said an announcement could be made in Washington at noon EDT.

The Chrysler restructuring marks another key moment for the struggling American manufacturing sector. In 1925, Walter P. Chrysler established Chrysler Corp. Three years later, the company laid the cornerstone for the Chrysler Building, briefly the world's tallest building and still an unmistakable part of the Manhattan skyline.

On Wednesday, Obama said concessions by Chrysler's unions and its major bank lenders had made him more hopeful than a month ago that the struggling automaker could be made viable.

But he added it was still not clear if Chrysler would need to seek bankruptcy protection to cement concessions from lenders and move ahead with the Fiat deal.

The White House has set a series of aggressive targets for Chrysler in order to justify another $6 billion in investment on top of $4 billion in emergency loans the government has extended since the start of the year.

The automaker has won cost-cutting concessions from its unions in the United States and Canada and was on the brink of closing its deal with Fiat on Wednesday, a person involved in those negotiations told Reuters.

Putting the two car producers together would give the combined group annual sales of some 4.16 million vehicles, making it equal with Hyundai and behind Toyota, General Motors, Volkswagen and Ford.

Fiat Chief Executive Sergio Marchionne thinks a carmaker needs to produce at least 5.5 million cars a year to survive.

MORE MUSCLE FOR MERGERS?

Under the terms of the proposed partnership, Fiat would get access to the U.S. market and a minority stake in Chrysler in exchange for the technology to make small cars and access to overseas markets. No cash would change hands.

Scajola said the Chrysler deal would also give the Italian company good cards to play in a reorganization of the European car sector -- where speculation has linked Fiat to France's Peugeot and the Opel unit of GM.

If successfully completed, this (Fiat) alliance will help sustain our business, Nardelli said in his memo.

The debt restructuring talks have been spearheaded by the Obama administration's autos task force and former investment banker Steve Rattner.

In a bid to win over three fund firms that had spurned an offer to accept $2 billion in cash in exchange for writing off all of Chrysler's $6.9 billion in secured debt, U.S. officials sweetened the terms by throwing in another $250 million, people familiar with those discussions said.

About 45 financial institutions hold Chrysler's secured debt. Failure to win their support on debt forgiveness would send the automaker into bankruptcy, officials have said.

Chrysler's race to restructure has played out as a kind of prelude to the slower-moving process under way for GM.

GM, which has been kept in operation with $15.4 billion of U.S. government funding, has until June 1 to push ahead with its own restructuring which includes plans to cut 40 percent of its U.S. dealers in less than two years.

(Reporting by Kevin Krolicki, Soyoung Kim, David Bailey, Nick Carey, Jui Chakravorty, John Crawley and Giselda Vagnoni; writing by Jo Winterbottom and Patrick Fitzgibbons; Editing by Andrew Callus and John Wallace)

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