Fiat has confirmed its commitment to increasing its stake in Chrysler by 16 percent in the event that the U.S. automaker refinances its loans from the U.S. and Canadian governments. Fiat is essentially exercising its option to acquire an incremental 16 percent stake at a price of $1.27 billion upon full and final repayment of the government loans.

The deal was struck earlier today with Chrysler and its other shareholders, with Fiat to exercise its option concurrently with the repayment of the government loans if those transactions are completed during the second quarter of 2011.

If all goes to plan, Fiat’s overall stake in Chrysler will stand at 46 percent. You may recall the Italian auto giant has already reached the first two of three goals that will allow it to increase its stake in Chrysler without paying any cash: the supply of a fuel efficient 1.4-liter engine and a 40-mpg vehicle based on a Fiat platform.