CEO Sergio Marchionne says Fiat is "prepared to walk" away from alliance talks with Chrysler unless unions grant significant new concessions.

Chrysler’s white knight is ready to gallop off into the sunset.  Fiat Group SpA will walk away from alliance talks with the floundering U.S. automaker unless Chrysler’s unions agree to make significant concessions, Fiat CEO Sergio Marchionne says.

Pulling together a deal with the Italian automaker is critical to Chrysler’s survival.  Late last month, President Barack Obama rejected the maker’s request for additional aid, giving it only until April 30^th to either line up something with Fiat or another potential partner.  Barring such a deal, industry observers believe the White House will allow Chrysler to sink into bankruptcy, very likely to be broken up.

“Absolutely, we are prepared to walk.  There is no doubt in my mind,” Marchionne told the Toronto Globe and Mail, in an interview published today.  “We cannot commit to this organization unless we see light at the end of the tunnel.”

The light Marchionne apparently wants to see would be a signal from the United Auto Workers Union and Chrysler’s other labor groups that they are willing to accept further concessions that would sharply drive down manufacturing costs.  The American automaker also reportedly still needs to strike a deal with reluctant bondholders.  They’ve been dragging their feet on concessions of their own – in part because there’s hope that in a bankruptcy, they might actually be able to recoup a higher return than is currently being offered by Chrysler.

In the Globe and Mail interview, Marchionne indicated that he believes there is just a 50 percent chance of pulling off a deal in time to meet Pres. Obama’s deadline.

“The dialogue is out of sync,” Marchionne said. “I think they need to see what state the industry is in. Canada and the U.S. are coming in as the lender of last resort. …. No one else would put a dollar in. This is the worst condemnation of the viability of this business.”

The Fiat CEO stressed that no one wants to remove the U.S. and Canadian autoworkers’ unions from the table, “But it will happen if a bankruptcy process drags on. The UAW and the CAW have a unique opportunity here to change the framework of the discussion.”

Should a Fiat deal be hammered out, Chrysler stands a solid chance of winning another $6 billion in aid from the Obama Administration.  The question is what next?  Will that be enough to tide the automaker through its on going cash crisis?

Chrysler Vice Chairman Jim Press has said, on several occasions, that an alliance with Fiat would generate the equivalent of $10 billion in cash for the U.S. maker.  This would come in a variety of ways, including access to new technology, new designs and products or product platforms Chrysler could begin to market through its own brands.

The U.S. maker, which has a minimal presence abroad, would gain access to Fiat’s global distribution channels.  Meanwhile, the Italian company would achieve one of its own, key goals, a return to the U.S. market, which it abandoned two decades ago.

Fiat’s Alfa Romeo brand made a tentative return to the States, last year, with the introduction of its super-exclusive 8C sports car.  But, longer-term, it would look to come back with higher-volume products, such as the Alfa 149 or 159 models.  Fiat might also return with its Cinquecento, or 500, microcar.  It’s unclear whether the Italian maker would market products solely under the Alfa brand or both Alfa Romeo and Fiat.

But “Chrysler needs its own Cinquecento, meaning a model that is the remaking of Chrysler,” said Marchionne.

What’s unclear is how quickly all this could happen.  Inside sources at both Fiat and Chrysler warn that the current line-up of Italian products would likely require re-engineering – in some cases modest, in some cases severe rework – in order to meet American crash and emissions standards.  As a result, a product like a Chrysler 500 might not be available until 2012 or beyond.

How Chrysler will tread water until then remains to be seen.