"If you don't have that entry-level small car and we see $3.50 or $4 per gallon, that could be a huge problem of really not having a product in a segment that would be very hot with high fuel prices," Cole said.

Energy analysts predict the $3 level could be within reach in some parts of the U.S. next summer, but that prices in 2007 should mainly be lower than in 2006, when they averaged $2.38 a gallon nationwide.

The agreement also helps Chery by giving it access to design, engineering and manufacturing skills that it doesn't currently have, Cole said.

The Chery-produced cars likely would be sold for $8,000 (euro6,074) to $10,000 (euro7,593), and would have to be high quality to compete with Chevrolet, Honda, Nissan, Toyota and other automakers that already are selling B-cars, Cole said. Chrysler likely would give Chery more credibility than it would have had selling the cars on its own in the U.S., he said.

Cole said the Chrysler-Chery deal likely will not be the largest one between a U.S. automotive company and a Chinese manufacturer. General Motors Corp. and Ford Motor Co. already have significant manufacturing deals with Chinese companies that could be larger, he said.

GM spokesman Tom Wilkinson said the Chery cars certainly would compete against Chevrolet's Aveo small car, which is built by GM Daewoo in South Korea. But he questioned whether the Cherys would be able to carve out a niche in a competitive market.

"The car would have to be good enough to earn its way into the segment," Wilkinson said.

The United Auto Workers union, which has been critical of companies that move manufacturing jobs overseas, would not comment on the Chrysler-Chery deal.

Last year, GM settled several legal disputes with Chery over allegations that it had stolen GM's design of the Spark minicar, which looks similar to the Chery QQ.

GM had sued to prevent Chery from selling the car in various markets, including Asia and Eastern Europe.

Terms of the settlement were not fully disclosed, but Chery agreed not to market its vehicles under the Chery name in the United States. GM and Chery also agreed not to take further legal action against each other.

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