New York  - Chrysler faces a critical court hearing Friday that could decide whether the struggling US carmaker can emerge from insolvency in an alliance with Italian firm Fiat.

A New York appeals court will hear the objections of an Indiana state pension fund, which challenged a lower court ruling this week that allowed Chrysler's best assets to be sold into a new company controlled by Fiat.

Approval by the appeals court would pave the way for Chrysler to exit the bankruptcy process a little more than a month after it sought the court's protection - a speedy outcome that most analysts had thought unrealistic.

The Detroit-based manufacturer, which filed for bankruptcy April 30, is in a race against time. Fiat has said it may pull out of the deal if it is not court sanctioned by June 15.

A quick bankruptcy by Chrysler would offer some hope for its larger US rival General Motors, which declared bankruptcy on Monday. But GM's situation is more complicated, and the White House hopes it can emerge from the process in two to three months.

The US car industry has been in turmoil since the US economy went into a sharp downward spiral in October. Domestic car sales have tumbled more than 35 per cent since that time.

Both Chrysler and GM have taken billions of dollars in loans from the US government, which in turn is claiming equity stakes in both private firms.

Fiat hopes to gain a 20-per-cent stake of the new Chrysler company and virtually full management control. The majority of shares will be owned by a union health-care trust, while the US and Canadian governments will also take a slice. But Fiat could get a majority stake in future.

Chrysler owes about 7 billion dollars to creditors and has offered them 2 billion dollars to forego their debt. The Indiana pension fund is owed about 42 million dollars. (dpa)