The U.S. Treasury has reached a tentative deal with banks representing most of Chrysler LLC's first-lien debt but the agreement needs approval from more than 40 other lenders holding the automaker's debt, people familiar with the talks said on Tuesday.

Should this deal be approved, it would mark a major step toward cementing an alliance with Italy's Fiat SpA and could keep the U.S. automaker out of bankruptcy.

However, there could be no guarantee the debt restructuring would win support from Chrysler's lenders and a bankruptcy filing would still be possible, people involved in the discussion said.

The deal, reached late on Monday, would wipe out $6.9 billion of Chrysler's debt in exchange for $2 billion in cash, the people said.

Chrysler's lenders are currently doing due diligence on the terms of the deal and it has yet to be approved by all of the debt holders, one of the people said.

This is a very significant concession that these banks made, a second source said, adding that the deal would not provide lenders with equity in the company.

But there is still a possibility of a quick surgical bankruptcy should there be a need to drag along any recalcitrant banks, the source warned.

Further details on the high-stakes debt restructuring deal were not immediately available, and representatives of the lenders and the Treasury could not immediately be reached for comment. Chrysler declined to comment.

The news comes as Chrysler races toward its April 30 deadline to complete an alliance with Italy's Fiat SpA and follows an announcement by Chrysler that it has reached an agreement with the United Auto Workers (UAW) leaders to modify its labor contract and reduce the amount the company owes a retiree health fund.

The UAW would end up owning 55 percent of the struggling U.S. automaker under the concessionary contract members must vote on by Wednesday night.

Fiat would eventually own 35 percent of Chrysler stock, according to a UAW document distributed to Chrysler hourly workers.

Fiat's deal with Chrysler would be decided close to the Thursday deadline, Fiat Vice Chairman John Elkann said on Tuesday. Up till the end, we won't have much detail, he said, adding he was in contact with Fiat Chief Executive Sergio Marchionne.


The negotiations among Chrysler's lenders, the UAW and Fiat were taking place in parallel.

The creditors were wary of the risk that the Obama administration's autos task force would try to force a settlement that favored the union.

The agreement from Chrysler's principal banks is an exceptional accomplishment in line with the president's firm commitment that all stakeholders sacrifice to make this deal succeed, a senior Obama administration official said.

U.S. Rep. Gary Peters, whose Michigan Congressional district is home to Chrysler's headquarters, urged the debt holders to accept the deal.

The remaining debt holders should understand that this deal is better than what they could expect in bankruptcy, he said. I am hopeful this leads to an agreement to finalize an alliance with Fiat so that Chrysler can avoid bankruptcy.

The committee of Chrysler's lenders including JPMorgan Chase & Co , Goldman Sachs Group Inc , Morgan Stanley and Citigroup Inc last week proposed taking $3.75 billion in debt and a 40 percent equity stake in a restructured company.

That was above an offer of $1.5 billion in debt and a 5 percent equity stake from Treasury Department officials.

U.S. officials had been expected to make a new offer on Monday to the lenders' group representing about 45 institutions, including some hedge funds, which holds the secured debt of the struggling automaker.

In contrast to the banks, some of the funds had held out for a higher settlement and had argued that Chrysler's secured debt had to be paid out at a higher return than what was offered to the UAW for its unsecured healthcare-related claim.

That stance had come under fire from members of the Michigan congressional delegation and Michigan Gov. Jennifer Granholm, who said the creditors were holding out for an unfair payout that threatened to bankrupt Chrysler and scuttle its planned alliance with Fiat.

More than $4 billion of Chrysler's total first-lien debt is still held by the major banks led by JP Morgan, people familiar with the matter have said.

Chrysler has been kept afloat with $4 billion in federal loans since the start of the year and could get another $500 million before its month-end restructuring deadline established by the autos task force.

Additional reporting by Jui Chakravorty, Kevin Krolicki, John Crawley and Gianni Montani)

(Editing by Gerald E. McCormick, Patrick Fitzgibbons and Matthew Lewis)