A report carried by Bloomberg and citing the Italian weekly L’Espresso as source, says that that Italian investment bank Mediobanca has advised Fiat to sell its volume carmaking unit, Fiat Auto, to GM. But the bank also reportedly recommended that Fiat should try to hang on to Alpha Romeo by adding it to Ferrari, thus creating a viable Italian luxury and sports car company.

Mediobanca recently purchased a 34% stake in Ferrari, a move that wrecked earlier plans for a Ferrari IPO and was said to have angered Ferrari’s top management.

However, the sale brought in much needed cash to financially troubled Fiat. Despite restructuring efforts undertaken at Fiat Auto, the division has been under pressure from weakening demand – especially in Italy – as well as intense competition. Analysts say that losses could top one billion euros this year.

GM currently has a 20% stake in Fiat Auto and under the terms of the GM-Fiat alliance, Fiat has an option to sell the remaining 80% to GM from 2004.

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