Chrysler will continue to operate and still plans to sign the agreement with Fiat, officials said.

The bankruptcy projection would give the firm time to rearrange its finances under court supervision and offer it protection from creditors.

Government aid

Obama's auto task force in March rejected Chrysler's restructuring proposals and gave it 30 days to come up with an alternative, including the link with Fiat.

Chrysler is one of the so-called Big Three auto firms in the US alongside General Motors (GM) and Ford.

Both Chrysler and GM had asked for a combined $21.6bn in financial aid from the US government on top of the $17.4bn in emergency loans approved in December.

GM still has another 30 days to develop further restructuring plans while Ford has said it has enough money to survive the economic downturn without government aid.

GM has already announced earlier this month that it was to slash a further 21,000 jobs and close plants and dealerships, while Rick Wagoner, its chief executive, was ousted by the Obama administration in March. 

All three auto firms have faced criticism for failing to restructure their firms adequately as the US slid into recession and for not responding to consumer demand for more fuel efficient vehicles.