UPDATE 3-Fiat technology to boost Chrysler late 2010

* Chrysler to see technology benefits late 2010

* Spin-off of Fiat Auto "inevitable"

* Fiat should still show profit if tax breaks dropped

* Strong Q2 performance revives speculation of bond issue

(Releads with Chrysler after conference call, updates shares)

By Jo Winterbottom

MILAN, July 22 (Reuters) - U.S. car maker Chrysler should see the benefit in the latter part of 2010 from new technology to build cleaner cars given to it by Fiat, and will return to the stock market but not before 2010, the Italian car maker's CEO said.

Sergio Marchionne, who also heads Chrysler now that Fiat has a 20 percent stake, also told analysts on Wednesday that spinning off Fiat's auto business -- including the Fiat, Lancia and Alfa Romeo brands -- was "inevitable," even if the timing remained unclear.

As he presented second-quarter results for Fiat, which showed it back into a trading profit after two quarters of losses, Marchionne said Chrysler's turnaround would come when the U.S. auto market returned to sales of 13-14 million units.

"I think that we are going to see some healthy margins at the 13-14 million (car sales) ... which will not happen in 2010," Marchionne said.

Rival General Motors [GM.UL] said on Wednesday July car sales suggested an annual figure in the United States of around 10-10.5 million. [ID:nN2245607]

GM said first-half sales slid 22 percent but improved in the second quarter as the U.S. economy showed signs of stability, echoing Fiat's figures, which highlighted a slowdown in sales decline in the second quarter.

Chrysler's new board meets for the first time next week, Marchionne added, and the company has already received Fiat platforms to produce smaller, more fuel-efficient cars -- a strength of the Italian car maker.

OPEL AND INCENTIVES IN EUROPE

Fiat also made a bid for Opel, the European operations of GM GM.UL but is not among the three remaining suitors after Marchionne stuck to his original offer. [ID:LK181251]

Marchionne, who previously set a target of at least 5.5 million unit sales to survive, said he did not need Opel to make Fiat profitable. Between them, Fiat and Chrysler rank No. 5 worldwide with around 4.2 million unit sales.

"I think we should stop being fixated with this Opel issue of being the lifesaver of (Fiat Auto) ... Fiat made money in the second quarter of 2009. It will continue to make money for the remainder of the year. We're not threatened by anything or anybody in the market place today," he said.

Fiat had earlier beaten expectations with a second-quarter trading profit of 310 million euros ($440 million) after a loss of 48 million in the first quarter. It aims for trading profit over 1 billion euros this year.

Like other European car makers who are due to report later in the month, Fiat was helped by tax breaks for drivers trading in older, polluting cars. But Marchionne told analysts Fiat had worked to ensure even if these incentives were removed, it should be profitable.

"Even in that environment, I still expect Fiat to be positive," he said.

In the United States, more targeted discounting should improve margin performance over the next 12-18 months, Marchionne said, as Chrysler announced sales incentives of up to $4,500 per vehicle through to the end of August [ID:nN22314804]

In order to match production better to demand, Fiat has used temporary shutdowns and focused on cutting inventory.

That has also helped improve its cash situation and it cut net industrial debt to 5.7 billion euros from 6.6 billion in the period, mainly by selling down stocks. It still targets debt under 5 billion euros by year-end.

"The net debt evolution, while positive, does not mark as positive an inflection as many hoped," Morgan Stanley analysts wrote in a note.

Debt protection costs on Fiat tightened as its trading profits beat expectations and speculation revived it might consider issuing a bond, despite its current junk rating.

"You can't rule out that it might make an issue, given the good performance of the market, strong liquidity and more than anything the good impression Marchionne made at the presentation," a source close to the matter told Reuters.

Fiat shares ended down 1.7 percent against a broadly flat DJ Stoxx index of auto shares .SXAP. (Additional reporting by Claudia Cristoferi and Stefano Rebaudo in Milan, Helen Massy-Beresford in Paris; Editing by David Cowell and Rupert Winchester) ($1 = 0.7039 euro)