The agreement was reached eight months after the two sides signed a memorandum of understanding on the deal. Chery also signed a deal with Chrysler Group last month to export the first Chinese-made cars to the United States.
"The agreement means that Fiat, which has been testing Chery's engines during the past year, has recognized the technologies and quality of the engines developed by Chery," said Zhou Biren, deputy general manager of Chery.
The 1.6 and 1.8-liter engines will be used in cars manufactured by Fiat in China and abroad, according to a statement on Chery's website www.chery.cn.
The agreement showed confidence by Chery and Fiat in cooperation and paved the way for further cooperation, Fiat chief executive Sergio Marchionne was quoted as saying.
Yin Tongyao, chairman and general manager of Chery, said, "The cooperation will help improve Chery's competitiveness on the international market. We are glad to cooperate with Fiat and look forward to developing together."
Chery became China's fourth largest producer of passenger cars in 2006, with sales of 305,200 vehicles and a 7.2-percent domestic market share.
Zhou said both Fiat and Chery were exploring further possibilities of cooperation.
"We have decided to continue to discuss it in detail, since the cooperation is very important for us both sides and we will have a lot more issues to consider," Zhou said.
In an interim report, Chery reported exports of 52,712 vehicles in the first half, compared with 13,548 in the same period of last year, and the overseas sales are expected to top 100,000 vehicles for the whole year.
Qin Lihong, vice president of Chery Autos sales arm, said, "Many Chinese auto brands, including Chery, are upgrading their products and vigorously seeking to expand their presence in European countries and other developed nations."
Chery officials said last month at the Fifth China Changchun International Automobile Fair that Chery's vehicles had proved competitive in southeast Asia, the Middle East and North Africa, and the company planned to seek bigger markets in North America and Europe.
Chinese auto manufacturers, encouraged by robust sales, are seeking to expand their overseas presence and shed their image as low-grade vehicle producers.
Wang Ziliang, vice president of another ambitious Chinese automaker Geely, said "Geely is trying to change its image as a cheap, low-grade auto producer. It is taking established international auto brands as a benchmark, and trying to compete with them globally."
Other Chinese automakers, including Zhongxing, Jianghuai and Lifan said they are revamping their strategy, and investing heavily in developing higher-grade vehicles.
China exported 241,000 motor vehicles in the first half, a growth of 71.2 percent on the same period last year, with Russia the biggest market.
The combined export value amounted to US$2.7 billion, up 110.7 percent, said Fu Peizhao, deputy secretary-general of the auto branch of China Chamber of Commerce for Import and Export of Machinery and Electronic Products, last week.
The per-unit price of China's exported vehicles averaged US$11,200, up 23 percent on the same period last year.
A total of 38,600 vehicles valued at US$450 million were exported to Russia during the period, ranking first, according to the chamber.
Kazakhstan ranked second in China's automobile export market with 6,445 vehicles, while Iran ranked third.
Other countries that imported more than US$100 million worth of Chinese vehicles included Algeria, Syria, Vietnam, South Africa and Ukraine.
