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MARYSVILLE, Mich., Nov 18 (Reuters) - Chrysler LLC and ZF Friedrichshafen announced a deal on Tuesday whereby the German auto supplier will operate the No. 3 U.S. automaker's axle plant here in this eastern Michigan town.

Under the terms of the deal, Chrysler will retain ownership of the completed plant, where production is expected to begin in 2010, and will employ the 350 hourly workers who will produce three different axle types.

Many of those workers will come from a Chrysler axle plant in Detroit, which Chrysler president and vice chairman Tom LaSorda said would cut production as the Marysville plant increased output.

ZF will provide equipment for the facility, which will have additional capacity of 500,000 axles annually.

ZF Chief Executive Hans-Georg Haerter said the company hopes to manufacture axles at the plant for other automakers and said production capacity "could easily double" to 1 million axles a year.

Neither company would provide details of the investment for the plant.

Executives from Chrysler, which is owned by private equity firm Cerberus Capital Management LP [CBS.UL], Ford Motor Co () and General Motors Corp GM.N were in Washington on Tuesday to testify at a Senate Banking Committee hearing on a potential bailout for the U.S. auto industry.

GM and Chrysler in particular are running low on cash as auto sales have plunged to their lowest level in a quarter of a century against a backdrop of a slowing U.S. economy.

LaSorda declined to discuss the bailout, but said the deal for ZF to run the plant would provide short-term cash flow help for the struggling automaker.

General Holiefield, vice president of the United Auto Workers union said he was hopeful the U.S. government would approve a bailout for the U.S. auto industry.

"We've come a very long way, and I'm optimistic we can turn this around," he said. "America will see that they (the U.S. automaker) are great icons and worth keeping."

So far this year Chrysler auto sales in the United States are down 26 percent, compared to an industry average decline of 14.6 percent.

The automaker is involved in a legal dispute with the U.S. subsidiary of another German supplier, Getrag Corp, over an unfinished transmission plant in Tipton, Indiana.