Sergio Marchionne, Fiat's chief executive, said he was "prepared to walk" from a proposed alliance with Chrysler if the failing US carmaker did not secure cost-cutting concessions from its unions.
Mr Marchionne gave the partnership, Chrysler's best chance of avoiding a bankruptcy filing in coming weeks, only a 50:50 chance of being formed.
"Absolutely we are prepared to walk. There is no doubt in my mind," Mr Marchionne said in an interview with the Toronto Globe and Mail. "We cannot commit to this organisation unless we see light at the end of the tunnel." Fiat on Wednesday confirmed the comments from the interview.
Mr Marchionne singled out the Canadian Auto Workers' union for criticism, saying that it "may have taken more rigid positions" in talks on bringing down Chrysler's labour costs to the level of its Japanese rivals.
Fiat, which in January agreed in principle to share technology and plants with Chrysler, holds all the cards controlling the fate of the carmaker after the US government ordered it in late March to secure an alliance with another carmaker or face bankruptcy.
The US Treasury-led task force overseeing the domestic auto industry said that Chrysler was too small to be viable on its own, but that it was prepared to lend it another $5bn if it could clinch the deal with Fiat and secure concessions by creditors and unions by the end of this month.
Mr Marchionne has been meeting with Chrysler's management, America's United Auto Workers' union, the CAW, and the Treasury task force to tie up a deal which would see Fiat take a 20 per cent stake of Chrysler and the right to increase it in 5 per cent increments.
Chrysler is currently 80 per cent owned by Cerberus Capital Management, the buyout group, and 20 per cent by Germany's Daimler. The deal with Fiat, if successful, would see the Italian carmaker, the US government and Chrysler's creditors dominate the new board and become its largest shareholders.
Mr Marchionne may be asked to take an executive role in Chrysler and he said in the interview that it was "possible" that he might offer himself up as its chief executive. "It's possible that I will have to divide my time between running Fiat and running Chrysler."
Fiat's boss told the Globe and Mail that he would not offer odds on a Chapter 11 bankruptcy filing by Chrysler, and did not rule out a Chapter 7 filing, or liquidation of America's smallest domestic carmaker.
"[Mr] Marchionne is having problems making the Canadian union understand the way forward," a Fiat official, who requested anonymity, told the Financial Times. Fiat and Chrysler have made few public comments on the progress of the talks.
However, Chrysler, General Motors, and the US government are increasingly speaking publicly about the possibility of filing for bankruptcy in order to cajole recalcitrant stakeholders into agreeing cost-cutting concessions.
