Fiat has managed Chrysler since a 2009 bailout deal with the US government. It has paid a total of around $2 billion for its majority stake and agreed a number of conditions to be met before a full merger could take place.
Sergio Marchionne, CEO of both groups, has made Fiat one of Europe's top turnaround stories and wants to elevate the company to a global player through Chrysler.
"The acquisition of a further 5 percent of Chrysler is a fundamental step in completion of the integration between our two groups," Marchionne said in a statement on Thursday.
Chrysler and Fiat said they had formally committed to the US Treasury Department to produce the 2013 Dodge Dart sedan at a Chrysler plant in Illinois, the last performance event of three agreed with Washington in 2009.
That commitment, along with proving late last month to the US Environmental Protection Agency that the new Dart can achieve an unadjusted combined fuel economy of 40 miles per gallon, triggered the 5 percent ownership increase. The group had said it would reach the target by the end of 2011.
The remaining 41.5 percent ownership of Chrysler remains with a healthcare trust, called VEBA, affiliated to the United Auto Workers union.
Marchionne told Reuters in December it was possible Chrysler would have an initial public stock offering in 2013 as the UAW seeks to cash out or reduce its shareholdings.
Analysts have said that the biggest savings would come from a full integration of the two automakers to give the combined company the scale Marchionne has said is needed to compete as a global manufacturer.
Fiat, burdened by 5.8 billion euros of net industrial debt at end-September, might find it costly to buy the VEBA stake should the trust decide to sell.
Chrysler has become Fiat's chief source of strength this year, comprising two-thirds of Fiat's third-quarter profit. In December Chrysler's US sales increased by 37 percent on the month and by 26 percent year-on-year.
Marchionne has said his aim is to make the group one of the top 5-6 automakers in the world. The group is targeting global sales of 6 million units by 2014, a target that many analysts see as overly ambitious.
In the last year, Fiat increased its share in Chrysler five times. It has achieved all three performance events agreed with the US Treasury.
Chrysler also paid back loans from the US and Canadian governments six years early and exercised options to increase ownership.
Fiat shares gained 3.6 percent on Thursday while the Italian blue-chip index fell 3.7 percent. The European auto sector gained 2.9 percent.
Meanwhile, Chrysler Group LLC will add a third shift of 1,100 jobs at a Detroit plant where it will begin producing a diesel Jeep Grand Cherokee SUV, the company said on Thursday.
The Jefferson North plant in Detroit is the first Chrysler plant to add a third shift, and it was the first plant to expand to a second shift after the automaker's 2009 restructuring and bankruptcy.
President Barack Obama spoke at the Jefferson North plant along with Chrysler and Marchionne in July 2010 when a second shift was added.
The Jeep Grand Cherokee that debuted in spring 2010 was the first significant launch for Chrysler after Fiat took control of the company in 2009. Its sales rose 51 percent in 2011 to 127,744 Grand Cherokees.
While diesel fuel powers most vehicles in Europe, US consumers have been slow to embrace it, partly because diesel models generally cost about $2,000 to $3,000 more than like-sized gasoline models and US diesel prices are currently higher than gasoline.
However, some analysts think Chrysler is smart to introduce diesel in one of its best-selling vehicles.
"Diesel is definitely a growing market in the United States," said Rebecca Lindland, of IHS Automotive in Greenwich, Connecticut. "Those manufacturers that make diesel, namely Volkswagen and BMW, sell every one that they put on (US) dealer lots."
Chrysler has not said how many diesel-engine Grand Cherokees it will produce yearly. A source familiar with the automaker's plans said that in the first model year, Chrysler will import 6,500 diesel engines made in Italy to the Detroit assembly plant for the US market.
Even with the higher price, some consumers may opt for diesel engines because it offers fuel economy around 30 percent better than gasoline engines, Lindland said.
Chrysler and the United Auto Workers union both celebrated Chrysler's commitment to the city of Detroit, now struggling with massive financial woes.
The Jefferson North plant will expand to about 4,000 workers once the third shift begins working. Chrysler did not offer a timetable for the start of the new shift.
"We believe that investing in Detroit is not only the right thing to do, but it is a smart thing to do as we work to write the next chapter in our shared history," Marchionne said in a company statement.
Chrysler also last month announced that it will reopen its Connor Avenue Assembly Plant in Detroit to make the next generation of its SRT Viper. That will return nearly 150 hourly and salaried jobs to the plant.
