Fiat says it will buy the US government's 6% stake in Chrysler, which will give the Italian carmaker a majority share in the US company.
After Chrysler emerged from bankruptcy protection in 2009, Fiat agreed with the US government to share technology and management in return for a 20% stake and has quickly built that up.
Buying out the government would give Fiat 52% ownership of Chrysler.
The price will be negotiated within 10 business days, Fiat said.
In a statement, Fiat notified the US Treasury that it was exercising its option to buy the government's share.
Its stake is likely to increase to 57% by the end of the year, when it is expected to have met certain government targets.
On Tuesday, Chrysler said it had repaid $7.6bn (£4.7bn) in US and Canadian government loans, six years ahead of schedule.
Earlier this month, it reported a profit of $116m (£69m) in the first three months of the year, its first quarterly profit since it emerged from bankruptcy protection.