Merrill Lynch warned bankruptcy was not out of the question for General Motors after the car giant released grim sales figures last night.

In the clearest sign yet of changing consumer attitudes to fuel-hungry SUVs, Merrill cut its rating from buy to underperform and said its lower forecast for US car sales meant it would need to raise far more cash than the market was expecting.

The shares rallied more than $2 to $11.75 last night as its sales decline in June seemed to moderate. But Merrill predicts a massive fall in sales in the year ahead.

It cut its target price from $28 to $7 and added: "We believe there is potential downside in the stock below $7 and that bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised."

It said that management's best efforts at restructuring the business were being dwarfed by the fact that giant Sports Utility Vehicles may be rendered obsolete by soaring petrol prices while it would need to raise some $15 billion to see it through to 2010 at a time when credit is drying up. It said the company does not fully appreciate how difficult it has become to raise capital in tight credit markets.

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