Facing dwindling sales, Chrysler is discovering that it is easier to reinvent a balance sheet than a line-up of cars and trucks.

Now the clock is ticking, analysts say, and the coming months will be crucial to the bid by Italy's Fiat SpA to reinvent auto operations starved of investment in the run-up to Chrysler's bankruptcy.

After a quick makeover in Chapter 11 and some $14 billion in U.S. government funding, Chrysler has been given a clean balance sheet and much-needed small car technology from its new partner.

But its sales remain under pressure and analysts caution that fixing Chrysler's product difficulties will not be fast, easy or cheap.

The ultimate heartbeat of a car company is the ability to bring out vehicles that will sell, said Van Conway, a restructuring expert at Conway MacKenzie. There is a large question mark for Chrysler out there.

Chrysler's U.S. sales fell 15 percent in August, when overall industry sales rose 5 percent. Equally troubling was that its market share fell to 7.4 percent in August -- from 11 percent in 2008.

After freezing product development to conserve cash under former owner Cerberus Capital Management, Chrysler faces a dearth of new model launches, analysts say.

The result: Chrysler lacks small and fuel-efficient cars. Its truck-heavy lineup was called woefully uncompetitive by Consumer Reports in its latest issue.

With an average fuel economy of 28 miles per gallon for its fleet, Chrysler has the least fuel-efficient lineup among major automakers. General Motors' GM.UL average is 31 mpg, Toyota Motor Corp 36 mpg, Honda Motor Co 37 mpg, according to U.S. government data.

Erich Merkle, an analyst at Autoconomy.com, said he expects Chrysler's market share could drop as low as 4 percent by 2011. Merkle and other analysts said Chrysler will face a tough year in 2010 because it will feel pressure to drop unprofitable and slower-selling models like the Sebring.

At the same time, small cars from Fiat, including the 500, are not expected to arrive until early 2011.

Fiat may have the products and powertrains that will add to Chrysler's ability to do business. But 18 months is a lifetime in this industry, said Gary Dilts, senior vice president of forecasting at J.D.Power & Associates.

They don't have the option to wait for new products. Timing is the key to its survival, said Dilts, who headed Chrysler's U.S. sales before joining J.D.Power in 2007.

DIFFERENT CHRYSLER

Chrysler Chief Executive Sergio Marchionne, who also heads Fiat, said last month that the U.S. automaker was still burning cash but the rate had slowed.

He predicted the automaker would start to see healthy margins when U.S. industry-wide auto sales improve to 13 million to 14 million units -- a range not expected until 2011 at the earliest.

Meanwhile, Chrysler's current lineup remains heavily tilted toward larger vehicles and its quest to build competitive smaller cars has been marked by a series of missteps and false starts.

Sales of the Sebring sedan -- once touted as a car that would take on perennial best-sellers from Toyota and Honda -- have plunged 70 percent this year to just under 16,000 units.

By comparison, Toyota's Camry midsize car sold 238,612 units through August.

In 2007, China's Chery Automobile agreed to build compacts under the Chrysler badge, but the plan was aborted after Nissan Motor Co reached a similar pact with Chrysler in April 2008.

That proposed tie-up, under which Nissan would have provided Chrysler with a small vehicle for global markets starting in 2010, was abandoned last month.

The problem is that they just have never had a stable and consistent flow of products. There hasn't been any stable direction for the company, Merkle said. You never get down to the execution.

Under the latest alliance, Fiat took a 20 percent stake in Chrysler in return for giving Chrysler access to its car platforms and small-engine technology. No cash changed hands.

Chrysler estimated the cash value of the alliance would total up to $10 billion in terms of the cost to develop vehicles, platforms and powertrains from scratch.

But restructuring expert Van Conway said the Fiat-Chrysler alliance would work only with committed investment by Fiat.

They've got a lot for free but it's not going to be free because any working capital needs for product development, that's going to be covered by Fiat, Conway said. Fiat's going to have to put in a bunch of money to make it work.

(Reporting by Soyoung Kim and Jo Winterbottom, editing by Matthew Lewis)