The American car industry faced imminent collapse last night after the Senate effectively threw out a $14 billion emergency bailout bill.

Talks between the Democrats and Republicans over the viability of a federal-funded short-term rescue of General Motors and Chrysler fell apart late in the evening after the two sides of the political divide failed to agree on pay for workers at the auto companies.

Harry Reid, the Democrat Senate Majority Leader, yesterday said that Capitol Hill had thrown in the towel until Barack Obama, the President-elect, took office on January 20.

However, General Motors and Chrysler may not be able to wait until next month without seeking bankruptcy protection - a move which is expected to trigger the collapse of the entire American car-making industry.

Both companies have warned that they might run out of cash by the end of the year without federal help and Ford has also cautioned that the collapse of one of its rivals would drag it down into insolvency.

Despite talks between the two parties to try to come to an agreement over the terms of a rescue scheme for the auto industry, Senator Reid said: "It's over with".

A White House spokesman said that no decisions have been made in the light of the failure to pass the bailout bill, but added: "We will evaluate our options in light of the breakdown in Congress."

For the car manufacturers to receive the emergency state aid, a finance bill had to clear two major legislative hurdles before it can be signed off by President George W Bush.

While the Bill successfully passed through the House of Representatives on Wednesday evening, it had still to be voted on in the Senate.

Yesterday, it appeared that the Republicans had more than enough votes to block the rescue package.

Democrats spent much of yesterday lobbying their counterparts on the other side of the political divide on Capitol Hill, desperate to secure the 60 votes needed to force the bill through.

As a sign of increasing desperation, it emerged last night that General Motors has already hired a team of lawyers and bankers to work out whether the carmaker should throw in the towel and apply for Chapter 11 bankruptcy protection.

The car industry provides three million jobs across the country in manufacturing, suppliers and dealerships.

At present 6.7 per cent of the American workforce is out of a job and the unemployment rate is rising at its fastest pace for more than 20 years. It could feasibly hit 7 per cent before Mr Obama takes office on January 20.

Republicans are loath to use American taxpayer money to prop up what it perceives to be bust industries.

However, the dilemma over whether to help the carmakers has highlighted the fact that a Republican President, who favours a bail-out, has been unable to command enough support from his own party to vote through such a rescue scheme.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive