Marchionne said production of the 1.4-liter, four-cylinder engine will begin in the fourth quarter of next year. It will power the Fiat 500 minicar, which will be made in Mexico and will go on sale in the U.S. in 2011. It will eventually replace engines in other Chrysler vehicles.
Marchionne said the engine's variable valve timing system, which was developed by Fiat over the last five years, "gives the engine the lungs of an athlete." It improves fuel-efficiency by 10 percent and reduces emissions by 20 percent, he said.
Turbocharged and direct-injection versions are also in the works, which will allow the engine to replace some of Chrysler's V-6 and V-8 engines, Marchionne said.
The engine will be built at a plant in Dundee that had been the home of an engine alliance between Chrysler, Mitsubishi Motors and Hyundai. That alliance dissolved after Fiat took control of Chrysler this summer.
The Michigan Economic Growth Authority Board in November approved a $4.6 million, 10-year tax credit for Chrysler in exchange for investing $179 million in the Dundee plant. Marchionne said the investment will create 155 jobs.
Michigan was competing with Saltillo, Mexico, for the plant, and the tax break was needed because Chrysler could pay lower wages and taxes in Mexico, according to the memo. Saltillo also is closer to the factory in Toluca, Mexico, where the 500 will be built.
The Dundee plant has been held up as a model for the industry because of a flexible work agreement agreed to by the union as well as the requirement that all workers have at least a two-year college degree. Michigan Gov. Jennifer Granholm said she was worried that the plant would be closed down as part of the Fiat restructuring.
"It would be a waste to not deploy a flexible workforce that has great talent," she said.
Separately, Marchionne said Chrysler won't rule out a lawsuit after the Senate passage Sunday of a spending bill that sets up an arbitration process for dealers scheduled to be shut down by Chrysler and General Motors Co.
Marchionne said the legislation adds unnecessary complication and confusion to an already painful process for dealers, and that an earlier agreement struck with lawmakers that would have allowed arbitration should have been enough.
"Having said this, if Congress wants this, Congress gets this. And we'll live with the consequences and react accordingly," he said.