The Panda is one of the latest models in Fiat's city range

Profit for the three months ending June was 18m euros (�12m), compared with a shortfall of 25m a year earlier.

The car unit posted losses of 282m euros, partly due to a strike and lacklustre sales at home and in Europe.

Fiat, which also makes trucks, farming and construction vehicles, said it still expects to break even this year.

Shares in Fiat climbed more than 2% in Milan after the publication of the earnings figures.

New boss Sergio Marchionne is scheduled to discuss the results with analysts on Monday.

Rescue plan

According to the company, the loss at its car unit "reflects the impact of lower sales in Italy and the rest of Europe... which could not be fully offset by higher margins".

Fiat Auto's sales grew 2.6% in the second quarter, despite the introduction of new models.

Revenues were hampered by the industrial action that came to an end in May, just before death of Fiat chairman Umberto Agnelli. The three-week strike at the southern Melfi plant cut production by 130,000 cars

The company said that research and development costs also ate into profits.

Fiat has said a turnaround plan drawn up last year will lead it to break even in 2004.

Some 1,250 jobs at car manufacturing plants will be created as part of the rescue package, although the company will need to shed 2,800 jobs.

The "La Repubblica" newspaper recently reported that the firm's targets would be pushed back.