Chrysler, the No. 3 US automaker, has also been in discussions with India's Tata Motors Ltd about selling its Jeep Wrangler SUV in India and possibly other Asian markets, said the sources, who were not authorized to discuss the negotiations.
A spokesman for Chrysler, which is controlled by private equity firm Cerberus Capital Management LP, declined to confirm the talks.
A Tata representative had no immediate comment. Cerberus and Fiat representatives could not be reached immediately.
Fiat Chief Executive Sergio Marchionne, credited with steering a turnaround behind the Alfa Romeo, Lancia and Fiat brands, has said Fiat is looking for a partner for its return to the North American market.
Fiat is riding the popularity of its Fiat Cinquecento (500) compact car in Europe and Brazil.
A Chrysler tie-up with Tata could potentially open a new market for the Wrangler, the best-selling model from the brand widely seen as Chrysler's strongest.
One investment banker, who declined to be identified, said it was likely that a product-centered tie-up with Chrysler could lead to a larger deal over time.
"You could definitely see this evolve into something," the banker said. "It would make sense for Tata to buy Jeep if this partnership went through ... and Chrysler could really do with selling a brand and getting some cash."
Fiat and Tata already have a partnership. Fiat agreed this month to handle the financing in Europe for Tata's Jaguar and Land Rover brands, while Tata said it was open to Fiat selling Nano, the world's cheapest car with a price just above $2,500.
Tata and Chrysler are already cooperating on developing an electric vehicle. Tata said in January that "exploratory discussions" had begun with Chrysler over sales for a battery-powered version of its Ace mini-truck.
Chrysler is continuing those talks after reaching a memorandum of understanding for the negotiations, one person familiar with the automaker's plans said.
Tata, which controls about 60 per cent of India's truck and bus market, has global ambitions and an emerging line-up that runs the gamut from luxury to the sold-out Nano.
By concluding a deal with Tata, Chrysler also could look to sell a version of the Jeep Wrangler to the Indian military, another person familiar with the talks said.
Chrysler currently has a small joint venture in Cairo that has begun producing an armor-ready variant of the Wrangler called the J8, intended for use by troops.
Chrysler redesigned the off-road-ready Wrangler in 2007, adding a popular four-door version of the SUV that has emerged as the linchpin of its Jeep line-up.
US sales for the Wrangler dropped 4 per cent in the first half, while overall SUV sales plunged 15 per cent as Americans shifted toward smaller, more fuel-efficient passenger cars.
The sudden shift away from light trucks, including pickups, SUVs and vans, hit all three Detroit-based automakers hard in the first half and has forced them to restructure.
Like its larger rivals General Motors Corp and Ford Motor Co, Chrysler has faced scrutiny over its liquidity because of the sharp decline in sales.
Chrysler lost $1.6 billion in 2007, and the holding company that includes both the automaker and its financing unit, Chrysler Financial, lost $509 million in the first quarter.
Fitch Ratings downgraded Chrysler on Tuesday, warning that the automaker could run below the "minimum required levels" of cash to finance operations by the second half of 2009 if industrywide sales remain flat or worsen.
Gerry Meyers, a professor at the University of Michigan business school and chief executive of the old American Motors when it owned Jeep in the early 1980s, said it was clear that Chrysler needed international partners.
"In my mind, they're clearly under a financial strain. It may even be a liquidity strain. There are a lot of questions floating around about how much longer Chrysler can go on with problems like this," he said.
An overseas partner for Chrysler "could end up with one of the great American automotive brands in Jeep," Meyers said.
Fiat left the US market in 1983. The high-performance Alfa Romeo brand it later acquired pulled out in the 1990s.
In the years since, Fiat has been in merger or tie-up talks with all three US automakers that ultimately failed. Most recently, GM paid Fiat $2 billion in 2005 to unwind a troubled industrial partnership.