The government's loan board yesterday approved an unprecedented $3.5 billion financial assistance plan for Chrysler Corp. after four months of negotiations, authorizing an initial $500 million in government-guaranteed loans to save the auto company from bankruptcy.

Treasury Secretary G. William Miller and Federal Reserve Chairman Paul A. Volcker announced the approval of the Chrysler aid plan yesterday after an agreement between Chrysler and Canadian officials produced the final piece of the plan.

Miller said the government pledged its share of $1.5 billion after Chrysler obtained the last in a series of commitments for $2.03 billion elsewhere. He estimated Chrysler will have to borrow $1.1 billion of the U.S. share that was authorized by Congress.

Miller said that with the government-guaranteed loans and other assistance Chrysler can survive estimated losses of $1.05 billion this year and go on to become a viable auto producer.

"I think quite frankly if this financing were not available, the resources of Chrysler would be exhausted this month," Miler told reporters.

He said the Chrysler Loan Guarantee Board and its staff believe the company can produce 400,000 new compact and subcompact cars this year, and 900,000 next year, to regain a stronger place in the American auto market.

The board's action was necessary to implement the Chrysler aid program authorized in December by Congress. The board, consisting of Miller, Volcker and Comptroller General Elmer Staats, was required to find that Chrysler could survive if given federally guaranteed loans to meet its critical cash needs.

Congress has 15 days in which to review the board's action, but it is not expected to oppose the decision. If it does not, Chrysler can begin borrowing $500 million on May 27, issuing 10-year notes or debentures in denominations of $10,000 or more, redeemable after three years and guaranteed by the federal government.

The board said Chrysler is likely to raise $628 million from the sale of real estate, its subsidiaries in Australia, Argentina and Brazil, a 51 percent share in Chrysler Financial Corp. and other property.

Canada and state and local governments in this country are contributing at least $357 million to the Chrysler plan. Michigan has already lent Chrysler $150 million, guaranteed by a mortgage on a renovated Chrysler engine plant, and Indiana and Delaware are providing smaller loans.

The outside financing of $170 million by the Canadian government comprised one of the last and most troublesome parts of the aid package as Canadian officials held out for assurances that Chrysler would maintain set levels of employment in that country.

Loan guarantees of $170 million by the Canadian government comprised one of the last and most troublesome parts of the aid package as Canadian officials held out for assurances that Chrysler would maintain set levels of employment in that country.

The Canadian funds would be available in 1982 and 1983 as the company renovates van-wagon production facilities there and the company would have five years to repay the loans, starting in 1985.

Chrysler chairman Lee A. Iacocca met through the night with Canadian officials Friday to get an agreement on assistance from Ontario Province, where Chrysler's Canadian production facilities are located.

Ontario was initially expected to provide up to $50 million in loan guarantees, but balked at the last minute, reportedly because of the political sensitivity of the Chrysler bailout in Canada.

Instead, the province will contribute half of the $20 million cost of a new research and development project to assist Chrysler.

Word of the Ontario agreement was then relayed to Washington yesterday morning, and the loan board called its press conference to announce approval of the financing plan.

Congress required that Chrysler obtain at least $1.43 billion in nonfederal assistance. The final plan proposed by the company contained $2.4 billion in nonfederal aid, but the board concluded that $2.03 billion was a more reasonable and realistic figure. The chief difference between the two figures arises from estimates of Chrysler's profit from sale of its assets.

Iacocca, in a statement yesterday, said the board's decision "will help establish Chrysler Corporation as a strong competitor in the market of the 1980s. . . . It was a difficult decision, but it was a good decision. And we intend to prove that to the entire world."

Volcker said he was satisfied the combination of private aid and guaranteed loans gave Chrysler "a reasonable prospect of becoming a going concern."

Its success or failure, he added, will depend on whether it can sell its new, fuel-efficient cars -- the front-wheel drive K-body models it will be producing this fall.

Congress is not expected to overturn the board's action. Sen. Donald W. Riegle Jr. (D-Mich.) an active Chrysler supporter, said "the package seems solid to me," and expressed confidence in a favorable congressional reaction.

Rep. Henry S. Reuss (D-Wis.), chairman of the House Banking, Finance and Urban Affairs Committee, still has doubts about the plan and the company's future, however.

He said that "serious problems remain and the future viability of Chrysler in its present form must be regarded as uncertain. Chrysler's profit forecasts have so far proved to be consistently too optimistic."

It may be best for Chrysler to merge with a successful foreign auto company in order to assure production of fuel-efficient cars at the Chrysler facilities, he said.

Some members of Congress have been concerned that the contribution by banks and other Chrysler creditors to the plan was insufficient.

Chrysler owes $1.869 billion in long- and short-term debt to lenders in this country, Japan, Canada and Europe. The board said lenders have agreed to accept delayed payment on loans due before 1983, a concession worth $154 million to Chrsyler, to waive interest payments of $181 million and accept deferred payment on another $345 million.

Miller said he considered the lenders' willingness to defer principal and interest payments as the equivalent of new credit, satisfying a condition set by Congress in the Chrysler aid program.

On the bulk of its outstanding loans, Chrysler has agreed to pay an aggregate interest rate of 15 percent. Some of Chrysler's lenders have also agreed to grant Chrysler an option of exchanging up to $750 million in notes covering its deferred interest obligations for new preferred stock issued to the lenders.

For this swap to occur, certain conditions must be met, including the sale of 350,000 K cars in the 1981 model year.

In concluding that Chrysler could become a going concern, the board noted that the company has reduced its fixed costs for 1980 by $122 million through plant closings and layoffs. The company's domestic employment is just under 90,000, with 35,000 employes laid off.

Miller said that some final legal agreements need to be signed to pin down the concessions and pledges that comprise the aid package, but added he foresaw no problems in this area.

He said that while the plan does represent a risk to taxpayers, a Chrysler failure would be much worse, costing the country $3 billion over two years.

"If Chrysler goes bankrupt, you not only have the human suffering or unemployment and the disruption of production of Chrysler and its suppliers, dealers, and all those who do business with it. You then have higher welfare benefits, higher food stamps" and other kinds of governmental assistance, Miller said.