Shares in London plummeted by nearly 150 points today, following the failure of US carmakers to secure a $14 billion rescue fund from the Government, raising the prospect that Chrysler and General Motors could file for bankruptcy within days.

The FTSE 100 index of leading shares tumbled 146.13 points to 4,242.56 as details of the US Senate's refusal to back the bailout deal emerged. London shares followed Asia markets lower, with Japan’s Nikkei 225 Index, briefly falling over 7 per cent on massive selling of Toyota, Honda, Nissan and the other domestic automakers.

The Hang Seng plummeted nearly 7 per cent while the China Enterprises Index of mainland stocks dived 8 per cent. Asia investors are fearful that the market will become flooded with cheap US cars if America’s “Big Three” go bust after the Senate effectively threw out a $14 billion emergency bailout bill.

Pain was felt across Europe where stocks tanked, with Germany's Dax down 3.9 per cent dragged lower by local carmakers, BMW, Daimler and Porsche. While in France, the CAC index fell 4.3 per cent on Renault and Peugeot's tumbling shares.

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.

Overnight, oil prices slumped by more than $2 to $45.90 a barrel on the prospect of a steeper-than-expected fall in demand for fuel if America's major carmakers go bust.

The International Energy Agency has already forecast that oil demand is set to fall by 200,000 barrels a day this year, the first drop since 1983.

However, the collapse of America's car industry could depress demand even further, putting more pressure on Opec, the cartel of oil producing nations, to cut supplies when they meet next week.

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.

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