Italian automaker Fiat SpA has agreed to pay $1.27 billion for another 16 percent stake in peer Chrysler this quarter, the Italian automaker said on Thursday, in a deal that was faster and cheaper than expected.

Fiat has reached agreement with Chrysler and its other shareholders to exercise an option to buy the 16 percent stake in the second quarter, it said in a statement.

The option would be exercised when Chrysler's debt with the U.S. and Canadian governments is repaid, it said.

Fiat owns 30 percent of the Big Three U.S. automaker and expects to add another 5 percent by the end of 2011, it said. The 16 percent stake would eventually bring Fiat's holding to 51 percent.

Three sources familiar with the issue said last week that Fiat was looking to pay around $1.5 billion for the stake and the deal would be closed in coming months.

Shares in Fiat were up 2.43 percent at 6.735 euros at 3:10 a.m. EDT. The STOXX Europe 600 autos index <.SX7P> were up 0.15 percent.

(Reporting by Ian Simpson; Editing by David Cowell)

Chrysler