Meeting Prime Minister Silvio Berlusconi and senior officials, angered over the possible headquarters transfer, top Fiat management confirmed the investment plan, a government statement said.
But the question of whether Fiat would remain based in its birthplace of Turin remained unclear, with local officials saying it had been put off for three years and would depend on the company's performance.
"The Fiat president and chief executive, John Elkann and Sergio Marchionne, confirmed to the government their intention to pursue their development targets ... which envisage auto production rising from 650,000 vehicles to 1.4 million annually after an investment of some 20 billion euros ($27.2 billion)," the statement said.
"The government notes positively the position taken (by Fiat) and ... for its part confirms its willingness to bring about the best competitive conditions" in Italy, it added.
Marchione has sharply criticised working practices in Italy, saying they put Fiat at a huge competitive disadvantage.
On Monday, the government said Berlusconi would meet Marchionne on Saturday following the Fiat chief's controversial remarks that the auto maker could headquarter in the United States after a merger with Chrysler.
Marchionne, who had assured workers earlier this month he had no immediate plans to merge Fiat with its American partner, said in San Francisco last week that the two groups could combine within three years into a company with US headquarters.
His comments caused outrage in Italy, where Fiat is a national symbol and the country's largest private sector employer.
Trade unions and politicians have already accused Marchionne of "blackmail" in pushing through a tough deal on working conditions at Fiat's flagship Mirafiori plant in Turin to save the factory from closure.
"Fiat is a great multinational which is growing in the world but its heart remaine Italian, Industry Minister Paolo Romani said Saturday, adding, "All arguments are now closed."
Romanni had said Monday that he would be asking Marchionne "to commit to investing in our country and remain with head and heart" in Italy.
Mayor of Turin Sergio Chiamparino said Saturday the Fiat bosses had confirmed "the Italian nature" of the company but "in a dynamically developing context which demands daily work so that things don't change."
Provincial governor Antonio Saitta said that according to Marchionne, the terms for the city remaining Fiat headquarters would be discussed in 2014.
Last month Fiat raised its stake in Chrysler from 20 to 25 per cent with an option to go up to 51 percent this year.
The two groups plan to produce six million vehicles annually by 2014, up from the current four million.