United States President Barack Obama believes a quick, negotiated bankruptcy is the most likely way for General Motors to restructure and become a competitive carmaker, say people familiar with the matter.

Obama is also prepared to let Chrysler go bankrupt and be sold off piecemeal if the third-largest US carmaker can't form an alliance with Fiat SpA, say members of Congress who were briefed on the GM and Chrysler situation before the President said two days ago that the companies' viability plans were insufficient.

The President gave GM 60 days to come up with deeper cost and debt reductions than the biggest US carmaker proposed in its plan last month.

The "quick and surgical" bankruptcy his Administration said was also an option appeared to be inevitable, the sources said. Obama personally signed off on asking GM chief executive Officer Rick Wagoner to step down, they said.

A GM bankruptcy would mark the fall of a corporate icon that as recently as 2004 posted a US$2.8 billion ($5 billion) profit and in 1962 controlled 51 per cent of the US domestic car market.

A plunge in sales of sport-utility vehicles and pickups as fuel prices soared, coupled with the seizing up of credit markets, caused GM to lose US$82 billion in the past four years and seek Government help to survive.

"The President's position has not changed," a White House official said. "He remains committed to a significant restructuring without a bankruptcy if at all possible."

GM spokeswoman Renee Rashid-Merem said: "Our focus is on accelerating the speed of our operational restructuring and reducing liabilities and debt on the balance sheet."

"GM will take whatever steps are necessary to successfully restructure our company."

Chrysler said it would work with Fiat and the Obama Administration "to secure the support of necessary stakeholders".

GM and Chrysler have had US$17.4 billion in aid since December to avoid bankruptcy as car sales reached a 27-year low. The carmakers have been trying to shed debt and workers and trim health-care costs to win US$21.6 billion in added assistance.

Obama gave GM a deadline to "fundamentally restructure" and said he would consider more aid for Chrysler only if it completed a partnership with Italy's Fiat within 30 days.

The sources said he still expected GM to try to avoid bankruptcy through negotiations with bondholders and unions and for Chrysler to continue talks with Fiat, though Administration officials were not optimistic.

GM must shrink US$27.5 billion in debt that bondholders have been reluctant to exchange for equity and US$20.4 billion in health-care obligations.

"We'll get it done in court or we'll get it done out of court," new chief executive Fritz Henderson said yesterday.

- BLOOMBERG