Ford has confirmed it has agreed "all substantive commercial terms" of Volvo's sale to Geely.
The announcement is viewed as a precursor to Geely seeking permission from the Chinese government to go ahead with the deal, something it must receive if the sale is to go through.
Sources suggest there is no set timeframe for such approval being given, and that it could take anything from days to several months.
Ford paid $6 billion (£3.7bn) in 1999 to buy Volvo; unconfirmed reports have said that Geely could pay $2bn (£1.2bn).
In a statement, Ford said: "Ford Motor Company confirmed today that all substantive commercial terms relating to the potential sale of Volvo Car Corporation have been settled between Ford and Zhejiang Geely Holding Group Company Limited.
"While some work still remains to be completed before signing – including final documentation, financing and government approvals – Ford and Geely anticipate that a definitive sale agreement will be signed in the first quarter of 2010, with closing of the sale likely to occur in the second quarter 2010, subject to appropriate regulatory approvals.
"The prospective sale would ensure Volvo has the resources, including the capital investment, necessary to further strengthen the business and build its global franchise, while enabling Ford to continue to focus on and implement its core ONE Ford strategy.
"While Ford would continue to co-operate with Volvo Cars in several areas after a possible sale, the company does not intend to retain a shareholding in the business post-sale."
Volvo Cars was founded in the Swedish city of Gothenburg in 1927 and hase 22,000 employees worldwide, around 16,000 of whom work in Sweden.
Geely has already moved to assure Volvo's management that it will not radically alter the company's set-up. In a statement, Li Shufu, Geely’s chairman, said: “Geely is committed to work with all stakeholders to complete the transaction in the best interest of all parties.
“Volvo will retain its leadership in safety and environmental technologies, and will be uniquely positioned as a world-leading premium brand to exploit opportunities in the fast-growing China market."
Ford announced last December it wanted to sell Volvo.
The US company picked Geely in October 2009 as preferred bidder for Volvo.
Geely last month said it had reached an agreement with Ford to own the intellectual property rights on Volvo's key technologies, including those related to safety and the environment.