updated 9/9/2005 8:30:41 AM ET 2005-09-09T12:30:41

Fiat Auto SpA has reached an agreement with Ford Motor Co. to work together on new models of their small cars, the companies said Friday.

Ford said the companies have signed a "memorandum of understanding" for the development of two small cars: a revival of Fiat's iconic "Cinquecento" and a new Ford "Ka."

"By working together on this project, both companies would envisage reduced development and material costs, while providing highly competitive products to the marketplace," the company said.

Lapo Elkann, in charge of brand promotion at the Turin-based car company, told Italian Radio24 that "Fiat and Ford are allied because they will make utilitarian cars together."

He said the car would be made on the platform of the Fiat Panda.

"The industrial agreement will be on one line of product," he added. "I can't tell if they will do more as they are still in talks."

Fiat CEO Sergio Marchionne had said earlier this week that Fiat would announce its first "targeted" alliance by the end of the year.

A broad-based alliance between Fiat and Detroit-based General Motors Corp. collapsed in February. Since then, the Italian company has been looking for an industrial partner to help cut costs in the competitive auto market, which is plagued with overcapacity.

Marchionne has said that Fiat must join a growing trend among carmakers to ally for the production of specific models or components.

Profit margins on small cars are often tight, and alliances are one way of cutting costs.

On Tuesday Fiat launched the latest version of its best-selling Punto. Fiat has made great efforts to promote the car, which it hopes can be a decisive factor in reviving its fortunes.

Fiat Auto is investing around $12.5 billion in 20 new models between 2005 and 2008. Fiat's prototype for the "Trepiuno," its resurrection of the "Cinquecento" first launched in 1955, won plaudits at the Geneva motor show last year.

Marchionne said Tuesday that Fiat will have cut its debt by some $6.02 billion this year, helped by a cash settlement from GM after the two companies broke their alliance, and by Fiat's sale of its stake in power company Italenergia.

Fiat Auto improved results in the second quarter of this year, when the unit cut its operating losses by two-thirds to 88 million euros ($106 million), said Marchionne.

The auto unit, which accounts for around 40 percent of the Fiat group's revenues and has been losing money since 2000, is aiming to be in the black starting in 2007.

Ford, which is struggling with high labor and health care costs and faltering sales of its popular sport utility vehicles, is dealing with a profit slump of its own.

In July the company reported that profits fell 19 percent in the second quarter, hurt by lower production and harsh competition in North America, where it lost more than $900 million. Ford's finance arm carried the automaker.

Ford announced a series of executive changes Thursday aimed at restoring profitability to its North American automotive operations. The company is also close to selling its Hertz Corp. rental-car division to a corporate buyout firm in a move that would help it raise cash, two executives familiar with the negotiations said Thursday. Hertz could sell for as much as $15 billion.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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