By Kevin Krolicki

DETROIT (Reuters) - Chrysler has disbanded a team of engineers dedicated to rushing a range of electric vehicles to showrooms and dropped ambitious sales targets for battery-powered cars set as it was sliding toward bankruptcy and seeking government aid.

The move by Fiat SpA marks a major reversal for Chrysler, which had used its electric car program as part of the case for a $12.5 billion (S$25.9 billion) federal aid package.

As late as August, Chrysler took $70 million in grants from the U.S. Department of Energy to develop a test fleet of 220 hybrid pickup trucks and minivans, vehicles now scrapped in the sweeping turnaround plan for Chrysler announced this week by Fiat CEO Sergio Marchionne.

Chrysler spokesman Nick Cappa said on Friday that an in-house team of electric car development engineers had been disbanded in favor of a more traditional organization.

The automaker's former owner, Cerberus Capital Management, had set up a special division called "Envi" -- derived from Environment -- to spearhead development of hybrid technology where Chrysler badly trailed competitors.

"Envi is absorbed into the normal vehicle development program," Cappa told Reuters.

Under mounting pressure to improve the fuel-efficiency of its line-up, Chrysler announced in September last year that it was developing three electric vehicles and would sell the first of the models by 2010.

In January at the Detroit Auto Show, Chrysler upped the ante on its electric car bet by pledging to have 500,000 battery-powered vehicles on the road by 2013, including sports cars and trucks.

But a presentation of Chrysler's five-year strategy by Marchionne on Wednesday made no mention of Chrysler's earlier electric car development plans.

Under the Marchionne plan, former Envi chief Lou Rhodes will become the group line executive in charge of electric car development for both Fiat and Chrysler, Cappa said.

As of Friday, the Chrysler Group website still featured pictures and advertisements for the now-scuttled electric vehicles it had been developing.

That includes the Dodge Circuit, a two-seat, all-electric sports car that Chrysler engineers had rushed into prototype by using a Lotus platform.

At the time of the launch of Envi in late 2007, Chrysler executives had said the unit would operate with the speed of a venture capital-backed start-up that would compress the three-to-five-year development cycle typical for automakers.

Chrysler is the only one of the six top-selling automakers in the U.S. market without a hybrid offering.

Marchionne told reporters and analysts electric cars would only represent "one to two percent" of Chrysler's sales by 2014, equivalent to less than 60,000 vehicles.

"Until the (battery) storage gets resolved, I think electric vehicles are going to struggle," he said.

Fiat is considering bringing a battery-powered commercial van to the U.S. market but those plans have not been finalized, other Chrysler executives said.

The Obama administration, which has set a target of putting 1 million rechargeable cars on the road by 2015, gave Fiat a 20 percent stake in Chrysler in exchange for bringing vehicles and more fuel-efficient engines to Chrysler.

Marchionne has forecast that Chrysler will be at break-even on a net basis in 2011. The automaker has said it plans to more than double U.S. sales over the next five years and roll out a dozen new models based on Fiat platforms.