"This is a great day for Serbian industry," Dinkic said. Under Wednesday's agreement, Fiat will acquire a 67% majority stake in the car factory once it has paid half of its 200m-euro share in the founding capital of the joint venture company, as envisioned in the September 2008 deal.

Altavilla said that the money will be transferred by the end of this year. The second 100m-euro installment will be paid in 2010, when Fiat will also invest 700m euros to modernise the car plant located in Kragujevac, Serbia's fourth largest city, about 140km south of Belgrade.

The Serbian government will retain 33% of Zastava, will be providing property and equipment for the joint venture company and will contribute 50m euros to its founding capital.

The annual output of the factory is expected to reach 200,000 cars by 2011. Under Wednesday's deal, that same year, the factory, which already manufactures the Fiat Punto, will start producing two new models to be sold on the US and European markets.

Dinkic said he expects exports to earn around 2 billion euros annually. According to him, the new company will employ about 2,500 workers.

Zastava, which is best known for its Yugo model, produced 16,000 Fiat Puntos for the domestic market this year.

Speaking at a news conference after Wednesday's signing, Altavilla praised Serbian President Boris Tadic for his personal role in clinching the deal.

"Tadic gave us his support and I am truly grateful to him," he said, thanking also the entire Serbian government, and especially Dinkic, for their co-operation and engagement.

In September of last year, Serbian officials hailed the agreement with Italy's largest carmaker as the biggest foreign investment in years.