Bailout negotiations for America’s biggest car manufacturers were locked in stalemate yesterday as politicians in Washington bickered over the form that any rescue of General Motors, Ford and Chrysler might take.

Fears that Washington will not act in time to save the car companies led Chrysler to appoint Jones Day, the law firm, for advice on filing for bankruptcy.

The heads of the three companies appeared before Congress for the second day running yesterday urging the Government to provide emergency loans of $34 billion (£23.3 billion) to prevent them from going bust. While both Democrats and Republicans believe that the carmakers should benefit from some federal help, they cannot agree on the form that it should take.

The White House refuses to allow GM, Ford and Chrysler access to the $700 billion bailout fund, called the Troubled Asset Relief Programme (Tarp), claiming that the money was intended only to help to stabilise the financial sector. However, it does support helping the carmakers with $25 billion from an Energy Department loan programme to promote fuel-efficient technologies. Congressional Democrats oppose that move and insist that the Bush Administration should help the carmakers with money from the bank rescue fund.

In opening remarks at a House of Representatives Financial Services Committee hearing, Barney Frank, its Democrat chairman, urged using funds from the Tarp. He argued that a collapse or bankruptcy of one of the carmakers would devastate the financial sector: “In the midst of the worst economic situation since the Great Depression, it would be an unmitigated disaster.”

Both General Motors (GM) and Chrysler, the weakest of the Big Three, are running out of time. They have told Washington that they need immediate assistance. Rick Wagoner, chief executive of GM, said on Thursday that his company needed an $18 billion loan, of which $3 billion would have to be made available straight away. Chrysler is requesting an immediate $7 billion. Ford wants a $9 billion line of credit, which it said it would not tap unless economic conditions worsened.

Mr Wagoner and Robert Nardelli, the chairman and chief executive of Chrysler, have proposed a March 31 deadline, by which time, as a condition of receiving financial aid from the taxpayer, they would return to Washington to show that their restructuring was progressing.

Mr Wagoner said that filing for bankruptcy protection was not an option because they believed that Americans would not buy a new vehicle from a company that had entered Chapter 11. He argued that potential car buyers would be worried that a collapse of the company would invalidate any warranty that came with a new vehicle.

However, Washington is nervous of committing taxpayer funds to bailing out corporate America and has spent the past two weeks trying to ascertain whether the taxpayer has a reasonable chance of being repaid, with interest. Two weeks ago, GM, Ford and Chrysler all faced Congress and begged for state aid and were temporarily refused. Nancy Pelosi, the Speaker of the House, who controls Washington’s purse strings, told them to submit detailed business plans showing how they would spend the money and how they planned to pay it back.

Washington is anxious to avoid any failure of the carmakers because they provide about three million jobs across the country.

GM said yesterday that it would make another 2,000 workers idle at plants in America and Canada amid a sharp fall in demand for new cars. The cuts come in addition to the 2,000 job losses announced last month at the plants in Michigan, Ohio and Oshawa, Ontario. GM’s sales fell by 41 per cent in November after falling more than 40 per cent in October.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts