DETROIT (Reuters) - Shares of General Motors Corp hit their lowest level since 1955 and dragged down the auto sector on Thursday after Goldman Sachs cut the struggling U.S. industry’s largest manufacturer to a “sell” rating and warned it would have to raise capital.

General Motors pick-up trucks are displayed in an autosales lot in Troy, Michigan June 3, 2008. REUTERS/Rebecca Cook

The panicky slide in GM GM.N shares capped a period of growing concern about liquidity risks to U.S. automakers and suppliers from a domestic auto market reeling from record gas prices and the impact of a housing slump and tighter credit.

The Goldman Sachs warning, including the unusual “sell” call on the U.S. auto industry’s largest player after a period of sharp stock price declines just ahead of the close of the second quarter, prompted selling across the sector.

GM Chief Executive Rick Wagoner said the embattled automaker had enough liquidity to carry it through the year and had financial flexibility beyond that.

“We’ve got a very good, solid funding base under any scenario we see, solid through the end of this year,” Wagoner told reporters after an economic event hosted by U.S. presidential candidate Barack Obama. “We have a lot of options to fund beyond that.”

Chrysler LLC, for its part, denied rumors it was facing a cash crunch or that it had been driven to filing for Chapter 11 bankruptcy. Those rumors had driven down loan prices for the privately held automaker, according to Reuters LPC.

“The rumor is without merit,” Chrysler spokesman Dave Elshoff said. “There is no basis for the rumor.”

Debt and equity markets were affected by growing concern for the deepening risks for the auto sector. The cost to insure the debt of GM and Ford Motor Co F.N hit records.

GM shares were down nearly 11 percent in early afternoon trade and touched a low of $11.21.

Major GM suppliers were also hammered. Shares in American Axle & Manufacturing Holdings AXL.N, which supplies axles for GM trucks, dropped 12 percent. Lear Corp LEA.N, downgraded to a "sell" rating by Goldman, tumbled 18 percent.

Shares in Ford, which had its price target cut by Goldman, dropped almost 5 percent.

With the Thursday price fall, GM's market cap fell to less than $6.5 billion. The company has the smallest market capitalization in the Dow Jones industrial average .DJI, of which it has been a component since 1925.

Next above GM in terms of market value in the Dow is Alcoa Inc AA.N, with a market cap of about $30 billion. Walt Disney Co's DIS.N cap is 10 times GM's at about $60 billion and Exxon Mobil Corp XOM.N is the leader at about $460 billion.

GM shares have lost 38 percent over the last month as more evidence has piled up that U.S. auto sales weakened further in June, raising doubts about the prospect for the second-half recovery that GM and other major automakers had anticipated.

Fitch Ratings on Wednesday cut debt ratings on GM and Chrysler ratings deeper into the “junk” category,” citing the fallout from weaker sales and high gas prices.

Fitch also said it would review Ford ratings over the next six weeks, which could also result in a downgrade.

CASH BURN RAISES CONCERNS

All three U.S. automakers, which have been hardest hit by the collapse in demand for pickup trucks and SUVs, have faced scrutiny in recent days over whether they have sufficient liquidity to ride out the current downturn.

Billionaire investor Kirk Kerkorian, who has invested about $1 billion in a contrarian bet on Ford, has offered to provide more capital to support the automaker’s turnaround.

Kerkorian’s chief auto adviser, Jerry York, told Reuters on Wednesday that he did not expect the U.S. auto market to bounce back in the second half of this year with an only limited rebound in 2009.

Earlier this week, Chrysler drew down a $2 billion credit line from Cerberus and Daimler AG DAIGn.DE, the German car maker that sold off a roughly 80 percent stake in Chrysler to Cerberus last year.

Under terms of the sale, Chrysler had until August to draw on the credit line, which included $1.5 billion from Daimler. The credit line pays interest fixed at 7 percentage points above the London interbank rate, Daimler has said.

Chrysler, which lost $1.6 billion in 2007, has said it ended the year with $9 billion in cash. Its U.S. sales are down 23 percent so far this year.

Analysts have also fixed their sights on GM, which ended the first quarter with $31 billion in cash and undrawn credit. Deutsche Bank and JP Morgan both warned last week that GM would be forced to borrow heavily to shore up its liquidity position.

Goldman Sachs analyst Patrick Archambault, who also cut his ratings on Tenneco Inc TEN.N, said he expected GM shares to continue to underperform as market fundamentals deteriorate. He cut his six-month price target on GM stock by $8 to $11.

“We think GM’s automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company’s dividend,” Archambault said.