General Motors (GM) and Fiat ended threats of legal action yesterday when the US industrial group agreed to pay €1.55 billion to terminate the companies' joint venture agreements and forestall attempts to force it to take over the Italian company's loss-making car division.

The deal was sealed by votes of both company boards.

Mr Rick Wagoner, GM chairman and chief executive, said: "GM and Fiat have agreed that it is in the best interest of their companies and shareholders to terminate the master agreement."

In 2000, GM took a 20 per cent stake in Fiat Auto, subsequently reduced to 10 per cent, and agreed to a "put" arrangement that gave Fiat the option to sell the rest of its car unit to GM.

Neither company dreamed the "put" would become an issue but both have stumbled badly. GM was keen to avoid taking over Fiat Auto and argued that the Italian company invalidated the "put" by restructuring.

Both firms are likely to view the settlement as preferable to a drawn-out dispute. It is manageable for GM, which has cash reserves of almost $23 billion (€17.9 billion). Crucially it removes a threat to its investment grade credit rating. GM will take an after-tax charge to earnings of about $840 million, or $1.49 per share.

The agreement is also a relief for Mr Sergio Marchionne, Fiat's new chief executive, who has bought time to turn round the company which is bleeding €1 billion a year. He can now try to forge money-saving development and capacity agreements with other car companies.

The agreement has scuppered two reasonably successful Fiat and GM ventures, one on the development of engines and transmissions and one which combined their purchasing power in Europe and Latin America.

However, GM, as part of its payment, receives a 50 per cent stake in an engine plant in Poland. Fiat will still be part of GM's worldwide purchasing operation and will benefit from a GM commitment to use a Fiat plant in Italy for some of its European engine requirements. - (Financial Times Services)