Updated from 1:24 p.m. EST

General Motors

(GM) - Get Report

and

Fiat SpA

(FIA)

of Italy said Monday that they had formed an industrial alliance aimed at cutting production costs for both companies.

In a stock swap, GM will acquire a 20% stake in Fiat's auto group, valued at around $2.4 billion, and Fiat will get a 5.1% piece of GM. GM will become Fiat's second largest shareholder, behind the Agnelli family. Fiat will also become the second-largest shareholder of GM, behind 11% owner

State Street

.

The deal could be a tentative start for an eventual takeover of Fiat Auto by GM. As part of the agreement, GM will have the right of first offer to buy the remaining 80% of Fiat Auto if it is put up for sale in the future. And Fiat would have the right to sell the remaining 80% stake in Fiat Auto to GM through put options on Fiat's shares. Fiat emphasized, however, that it planned to remain independent and that there were no current plans to exercise those options.

Shares of GM closed unchanged Monday at 77 13/16. Fiat's American depository receipts rose 1 3/16, or 3.4%, to 36 1/16.

The deal will team GM, the world's largest auto maker, and Fiat, the seventh largest, enabling them to slash production costs by sharing factories and technology, developing common components and piggy-backing their raw-materials procurement in Europe and Latin America. But the two companies will maintain their respective brands, marketing and management structures.

"This is an agreement between two companies that wish to remain independent," said Paolo Cantarella, Fiat's chief executive, in a conference call. "We remain competitors but will be allied in decreasing costs on the input side."

The companies expect the deal to save them around $1.2 billion a year by the third year, and $2 billion a year by the fifth year, a time when the companies expect to be sharing a significant number of components in their cars. GM, based in Detroit, says the deal will be slightly dilutive to its earnings during the first year of the alliance, but should contribute to earnings after that.

In forming the deal, the companies have stymied the efforts of

DaimlerChrysler

(DCX)

to acquire Fiat Auto. The German-American auto maker was said to be considering a more ambitions offer for 100% of Fiat Auto. Such a deal might have proven contentious because Fiat, based in Turin, is a source of national pride in Italy and is still controlled by the Agnellis, descendents of the company's founder, who own 33% of the company.

The GM-Fiat Auto alliance with Fiat Auto will not affect Fiat's desire to merge its commercial truck division, Iveco, with the truck-making unit of Volvo. In a conference call, Fiat's chairman, Paolo Fresco, said the company would continue to pursue the Volvo unit, as long as European Commission's antitrust opposition to an announced deal between Volvo and Swedish maker Scania keeps that deal from happening.

The two auto companies will continue to compete head to head in Europe's high-volume, low-margin compact car segment. Fiat Auto's main brands affected by the deal include Fiat, Lancia, Punta and Alfa Romeo. GM's European brands that will initially be most affected by the deal include Opel and Saab.

Though the deal is structured to benefit the company's costs rather than revenues, executives from Fiat said the deal might eventually extend to marketing alliances in the U.S., where Fiat does little business. Of particular interest would be a reintroduction of its Alfa Romeo brand, which has had minor success in the U.S. market in the past, Cantarella said.

The alliance will not involve other Fiat SpA assets, which include subsidiaries such as tractor and construction equipment maker

CNH Global

(CNH)

, commercial truck maker

Iveco

, sports car maker

Ferrari

or luxury car maker

Maserati

.

Fiat, which accounts for about 4% of Italy's GDP, sold 2.3 million cars in 1999, while GM sold about 8.9 million cars and trucks.

GM's foothold in the Italian auto maker follows a series of stakes the company has taken in Japanese companies. GM now holds 49% of

Isuzu Motors

, 10% of

Suzuki Motor

and 20% of

Fuji Heavy Industries

, maker of

Subaru

cars.