General Motors, the world’s biggest carmaker, could face bankruptcy if the market continues to spiral downwards and it is unable to raise enough capital, a leading broker has said.

Merrill Lynch said that GM could need a capital infusion of about $15 billion (£7.5 billion) and that it had “not recognised the stress in the capital markets”. The warning by John Murphy, a Merrill Lynch analyst, follows an 18 per cent fall in GM’s sales last month and a cut in its planned production for the current quarter. The note from Mr Murphy said: “Bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised.”

However, the American carmaker, which is clinging on to the title of the world’s biggest producer, said that it had enough capital for this year. “We continue to believe the company has sufficient liquidity for 2008 despite lower volumes,” a spokesman said. “If conditions continue to deteriorate, we would consider other operating measures.”

Merrill Lynch’s raising of the spectre of bankruptcy helped to send shares in GM to their lowest level for more than half a century only a day after they had bounced because investors thought that their June sales had been better than expected. The shares closed down 15.06 per cent at $9.98, helping to send the Dow Jones industrial average into bear territory, with a fall of 166.75 points to 11,215.51.

Times Archive, 1920: Petrol or Power?

The proposed changes look suspiciously like a reversion to the exploded theory that motoring is a luxury of the rich

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According to Chicago University’s Center for Research in Security Prices, which allows for the effects of share splits and other movements, the price is the lowest for GM since September 22, 1954. The shares have fallen more than 50 per cent this year after successive declines in the car market as buyers feel the impact of the credit squeeze and the high price of fuel.

On Tuesday GM shares rose 12 per cent after sales figures were published that were better than had been feared. Although the carmaker’s sales last month dropped by 18.5 per cent to 265,900, it fared better than its immediate rivals. Ford’s sales plunged 28 per cent. Toyota shifted 21 per cent fewer vehicles.

GM has pursued market share aggressively by boosting incentives for buyers and recently it introduced six years’ interest-free credit for some models. However, it has also cut production forecasts for the third quarter by 12 per cent to 900,000 vehicles.

Merrill Lynch’s warning over GM is the starkest yet, but investors’ fears over the health of the three big US carmakers — GM, Ford and Chrysler — have been growing steadily. This has been driven largely by the impact of the rising cost of fuel and steadily eroding consumer confidence.

Although the average price of petrol is still about half the level that it is in Britain, at just over $4 a gallon, it has risen more than 35 per cent in a year. That has led motorists increasingly to shun large vehicles, such as SUVs, that until recently were synonymous with the typical American motorist. GM has said that it is putting more emphasis on fuel-efficient cars and on Tuesday said that Asian manufacturers did not have the monopoly on such vehicles.

Rocky rental road

— General Motors sells about 20 per cent of its annual US production of about 3.8 million vehicles to car rental companies

— Avis Budget Group, a leading car rental group, issued a profits warning yesterday, saying that this year's earnings would be below last year's because of high fuel costs and lower volumes

— Dollar Thrifty gave warning on Tuesday that it would miss its earnings-per-share forecast of between $1 to $1.50

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