"The two vehicles planned for development, the new Fiat 500 and a replacement for the current Ford Ka in Europe, will play a significant role in each company's European product range," a joint statement said.
The Fiat Panda platform will be the basis for the development of the new cars, to be built at Fiat's existing plant at Tychy in low-cost Poland.
The new products will come to market in the 2007-08 period, with an annual volume of 240,000 units, divided equally.
Fiat has long said it wants to work with other carmakers on specific projects to reduce risks and costs, part of a plan to return to profit from 2002's record loss.
Fiat already has a joint venture with France's PSA Peugeot Citroen to make vans, and the two have a deal to make the vehicles in Turkey with carmaker Tofas.
Fiat has also co-developed an SUV with Suzuki and is in talks with Indian giant Tata Motors.