By Jorn Madslien BBC News business reporter

Under an option agreement entered into five years ago - when Fiat Auto seemed attractive - the Italian industrial group Fiat got the right to sell its troubled car-making subsidiary to GM.

GM has since challenged the deal's validity and negotiations have stalled - even though failure to reach a settlement could result in a lengthy and costly court case.

Until late Tuesday, most observers had believed GM was about to cave in and pay a sum in the region of $2bn (�1bn; 1.5bn euros) to Fiat Group.

GM's chairman Rick Wagoner has a lot on his plate

In return, Fiat would agree not to force GM to buy Fiat Auto.

That option is now just one of several paths that could lead towards a resolution, which would free both companies to focus on some very real and considerably more challenging problems.

And there are many.

Lossmaking divisions

Fiat Group, which for years was run with an iron fist by its patriarch Gianni Agnelli, is a leading player in Italy's automotive world.

Not only does it own 90% of Fiat Auto, which makes up about 40% of its revenue; it also holds a controlling stake in the supercar maker Ferrari Maserati.

Fiat is struggling, despite a string of recent new model launches

But both car divisions are struggling.

Maserati has been a loss-maker ever since it was acquired in 1990 and this has forced the unit into the red, thus putting on hold a long anticipated stock market float for Ferrari.

Last year, Ferrari invested heavily in the Maserati marque, racking up 57m euros in losses during the first nine months of the year as a consequence.

One way forward would be to sell the Maserati marque to Fiat Group, industry observers say.

Fiat Group could then make money both from the sale of Ferrari shares and still hold on to recently revamped Maserati.

The initial public offering of Ferrari shares could take place as early as this spring, industry observers say.

Challenged loyalties

Substantially greater challenges face Fiat Auto, which makes Fiat cars as well as Lancias and Alfa Romeos.

The models have traditionally enjoyed a loyal following in Italy, but their popularity, and sometimes even their availability, is weak elsewhere in Europe and in the US.

Recent efforts to move production to Iran angered Fiat workers

Worse; in recent years, even the style-conscious Italians have increasingly started looking elsewhere for their wheels.

Fiat's share of the Italian market, which accounts for 40% of its sales, stood at 27.8% last year, and there are no hopes of a return to its heyday when the company made six out of ten cars sold in Italy.

In fact, even achieving the 30.5% target Fiat Auto has set itself has proven tough, despite a string of new model launches last year.

Cost savings at its Italian car factories are also tough to push through. Last week, plans to shift some to Iran sparked walkouts and mass protests by its Italian workers.

National icon

Forcing GM to sort out the mess might seem like a tempting solution, though suggestions that GM would simply shut down the whole operation if it was forced to buy Fiat Auto makes this an implausible option.

GM's finances $57bn in unfunded healthcare liabilities $301bn debts $37.6bn cash on its balance sheet See GM's share price live

Closure of this national icon would spark massive protests across Italy, and not only by the car factory workers.

Indeed, industrial action could spread quickly, with much of the Italian people's anger being directed at both Fiat Group and the Agnelli family which indirectly controls 30% of Fiat.

The Italian government would probably also take a great deal more stick than the GM bosses in Detroit, USA.

For these and a host of other reasons, Fiat would prefer to sell back the option to GM rather than to sell the whole car division.

Pension liabilities

GM, meanwhile, is equally keen to steer clear of outright ownership of Fiat Auto.

Last year, GM Europe embarked on a comprehensive cost-cutting exercise involving the loss of 12,000 jobs and perhaps even the closure of a major factory.

Buying the marque no longer makes sense for GM

The company's European strategy seems to be gradually changing, away from local production towards importing models from the US or from joint-venture factories in South Korea, so acquiring more factories in Europe is really not on its wish list.

GM is also desperate not to become the employer of Fiat's 60,000 workers. The US giant is already weighed down by $57bn in unfunded healthcare liabilities to current and former workers. Those liabilities are predicted to increase by a tenth this year.

Giant debts

More importantly; the car maker's debts rose to a whopping $301bn last year when the giant borrowed extensively in the bond markets to deal with a potentially destabilising pension fund deficit: the company is paying out pensions to 2.5 people for every member of its active staff.

GM's finances have already spooked investors who have let its share price slip sharply during the last year.

Adding notoriously complicated Italian pension liabilities to the equation would do little to restore confidence in the stock markets.

Bond market players are also nervous about the state of affairs at GM. The company's credit rating is already close to junk status.

Additional lending to pay for an all-out acquisition of Fiat Auto would almost certainly push it over the edge and make its borrowing more expensive in the process.

Financial considerations are key for GM, which makes more money from its finance arm than it does from making cars.

But that is not to say its car loan operations are healthy.

The car maker has been offering US car buyers interest-free loans since the turn of the century in a desperate attempt to maintain at least some buoyancy in the fragile market.