Tim Reid: the politics of the U-turn | Bush throws eleventh-hour lifeline | Long road to recovery | Tom Baldwin: wrong type of car

President Bush yesterday effectively opened the floodgates to Washington's $700 billion (£468.9 billion) rescue scheme after the White House said it was considering allowing the near-bust American car industry to access the federal fund.

In an astonishing U-turn, the White House said it may permit General Motors and Chrysler to use the Troubled Asset Relief Programme (Tarp), which was set up in October to bail out Wall Street.

Under the terms of the Tarp, Washington uses taxpayer money to take a stake in a troubled company, providing the firm with an immediate capital injection in return for very onerous conditions to the way it runs its business.

The move by the White House, which has long opposed allowing non-financial firms to access the $700 billion bail-out fund, is expected to trigger a rush of other distressed industries who also believe that they deserve state aid.

Insurers and car leasing companies have already begged for access to the fund.

The shift came just hours after Republicans in the Senate blocked a bill that would have thrown a $14 billion lifeline to America's fragile car manufacturing industry.

Both General Motors and Chrysler have said that without an immediate cash loan, they may run out of money by the end of the year and be forced to apply for Chapter 11 bankruptcy protection.

It is widely believed that once the car groups enter Chapter 11 they will collapse because customers would be reluctant to buy a new car from a company that may not survive long enough to meet its obligations on warranties and servicing.

The move represents an embarrassing blow to Henry Paulson, the US Treasury Secretary, who devised the bail-out, after he has been publicly adamant that only financial firms should be allowed to tap the fund and that Congress should devise its own loan for the carmakers.

On Thursday night, Republicans blocked the passage of a finance bill to lend $14 billion worth of taxpayer money to the car industry because they insist that federal funds should not be used to prop up failing businesses.

However, Democrats, led by Barack Obama, the US President-elect, are anxious to prevent the collapse of the car industry because it provides around three million jobs across the country. Unemployment is already rising fast with 6.7 per cent of the American workforce out of a job.

A spokeman for the White House said yesterday: "A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time."

The prospect of an alternative rescue plan for America's carmakers cushioned a potentially disasterous opening to yesterday's trading on Wall Street.

While the Dow Jones industrial average lost 131.18 points to 8, 433.91, the decline was far from the steep fall that had been expected in reaction to the US Senate's rejection of the $14 billion bailout.

In London, the FTSE 100 index reversed slightly from earlier losses of nearly 180 points, to fall by 126.6 points to 4,262.09 by yesterday afternoon. In Germany, stocks continued to fall on the country's DAX index which declined 113.98 points, dragged lower by local carmakers, BMW, Daimler and Porsche.

While in France, the CAC 40 index fell lost 108.25 points to 3,197.88.

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