New York  - The Chrysler-Fiat deal passed one hurdle when a New York appeals court late Friday turned down the objections of a group of creditors led by the Indiana state pension fund that had challenged a lower-court approval of the takeover by Italian car maker Fiat.

But the creditors intend to appeal the decision again, this time to the Supreme Court, arguing that the deal is unconstitutional because it put their rights to be paid off at a disadvantage. The group also charges that the US Treasury Department overstepped its boundaries by footing the bill - 50 to 60 billion dollars - for Chrysler's restructuring, The Wall Street Journal reported.

In its green-light ruling, a three-judge panel of the New York appeals court delayed the Chrysler sale until 4 pm Monday - or until the Supreme Court says the sale shouldn't be delayed.

The struggling US carmaker is trying to emerge from insolvency in an alliance with Italian firm Fiat. The New York bankruptcy court earlier this week allowed Chrysler's best assets to be sold into a new company controlled by Fiat.

Approval by the appeals court theoretically paved 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 alternative to the approval of the sale is liquidation," US Circuit Judge Amalya Kearse said during Friday's appeals court hearing.

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)