Italian carmaker Fiat is setting up a joint venture with US peer Chrysler to make top-of-the-range cars at its Mirafiori plant in Turin, as it looks to ramp up home production to match European rivals.

Italy's largest industrial group, which owns 20 per cent of Chrysler, has pledged to invest 20 billion euros ($26 billion) to boost output and improve efficiency at its Italian car plants in exchange for more labour flexibility.

'We are in a difficult situation in Italy, our industrial network is not efficient and is not in a position, as things stand, to cope with competition,' chief executive Sergio Marchionne said after a meeting with unions.

The carmaker, losing money at all its plants in Italy, said the plan for Mirafiori would require an investment of more than 1 billion euros and more flexible labour rules.

'The only thing we ask for Mirafiori is to reach a higher level of flexibility and production,' Marchionne said.

Analysts say Fiat's 'Fabbrica Italia' project to boost Italy's lagging competitiveness to levels seen at rival European carmakers is key if it wants to grow.

Marchionne worked hard to convince workers to back a deal at its Pomigliano plant near Naples in June, which brought an increase in the number of shifts and limit to strikes and benefits. The unions welcomed the 'open' negotiations on Mirafiori, but one warned against a repeat of Naples deal.-Reuters