The US stock market made a poor start to trading today as General Motors (GM) edged closer to bankruptcy and Treasury yields rose to their highest level in six months, raising fears that ballooning US government debt could hurt a recovery in the economy.

The Dow Jones industrial average fell 173.47 points to 8,300.02 at close in New York after yesterday's rally on a better than expected reading of consumer confidence for May.

Bondholders in GM refused to back a deal whereby they would allow the car group to swap $27 billion in debt for a 10 per cent stake in a restructured company. The failure to reach an agreement means that GM is now likely to file for bankruptcy.

Fears also remerged about ballooning US government debt and its impact on borrowing costs amid a prolonged recession, pushing yields for US Treasury bonds higher.The yield on the benchmark 10-year Treasury note reached 3.58 per cent, a level last seen in mid-November.

Investors didn’t find relief in a bigger-than-expected increase in previously occupied home sales because a rise in inventories fanned worries that homes languishing on the market would continue to crimp the economy by hurting consumers and banks that hold mortgages.

The National Association of Realtors said sales of pre-owned homes rose from March to April as buyers hunted for bargains. Sales rose 2.9 per cent to an annual rate of 4.68 million last month. But the trade group also said the number of unsold homes on the market at the end of April rose almost 9 per cent to nearly 4 million. That is a 10-month supply at the current sales pace.

“While consumer confidence looking forward is improving, the reality is the economy is still very weak,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management.

In London, a volatile FTSE 100 closed 4.5 points higher at 4,416.23, a gain of 0.1 per cent and the pound remained strong against the dollar at $1.60 - a seven-month high.

Consumer facing stocks performed well boosted by the Confederation of British Industry’s quarterly service sector survey for May, which said the pace of decline in the sector was expected to slow as costs contracted.

Top gainer on the FTSE 100 was Intercontinental Hotels, up 6 per cent to 675p. Thomas Cook, the holiday group, rose 4 per cent to 233¾p.

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