Nancy Pelosi, the Democrat Speaker of the House, who holds Washington’s purse strings, sought to reassure Wall Street yesterday by insisting that doing nothing to bail out America’s car industry was not an option and that allowing the manufacturers to go bankrupt would be “digging the hole far too deep”.

Mrs Pelosi triggered panic in the stock market this week after she told General Motors, Chrysler and Ford to submit detailed business plans showing how they would recover before she would approve any bailout for the carmakers. She also indicated that she was in no hurry to help them and that any bill proposing rescue funds may not be voted on until next month.

However, Wall Street extrapolated her comments as evidence that Washington would not bail out the car companies in time and that at least one of the three would have to file for bankruptcy protection before Christmas.

In testimonies to Washington this week, Rick Wagoner, chief executive of General Motors, and Robert Nardelli, chief executive of Chrysler, said that they needed immediate federal aid to stay afloat. Mr Wagoner said that GM was losing so much money that it may burn through its cash reserves by the end of the year.

Mrs Pelosi’s hardline stance prompted General Motors shares to sink to their lowest level since 1938.

Yesterday, she explained: “We don’t have any intention of seeing the auto industry go down.” She said that she and Harry Reid, the Senate Leader, planned to outline their expectations for the next round of aid proposals in a letter to the carmakers’ chief executives. Mrs Pelosidemanded to see how they would use any emergency loan and how they would pay it back to the American taxpayer: “It’s another opportunity for them to say to the American people: ‘Give us your money because we’ll put it to good use.’ ” Under existing proposals, Washington is minded to introduce legislation that will allow the car companies to use a preapproved $25 billion loan that had been earmarked for paying for green modifications to new vehicles, for ordinary operating costs.

General Motors, whose shares sank a further 4 per cent yesterday before closing up 6.25 per cent at $3.06, said that it was already examining ways of reducing its workforce again.

Separately, the German business of Ford said that it was banking on the European Union bailing out the carmaker with an emergency loan package. The European Investment Bank is assessing whether it will make the loan to the industry, which has been suffering as the economic crisis has caused car sales to plummet.

Bernhard Mattes, the head of Ford’s German unit, said: “These would be loans with interest, that have to be paid back, so it’s not a gift. This is about modern technology and competitive competence for the world market.”

America relies on the three car companies to provide about three million jobs across the country. The incoming Obama administration, which does not take office till January 20, is very concerned about the speed at which unemployment in the US is rising and is anxious to help the carmakers to protect the jobs that they provide.

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