FRANKFURT/DETROIT (Reuters) - GM edged closer to preparations for possible bankruptcy on Wednesday, a source familiar with the company’s plans said, while Germany extended its subsidy for scrapping old cars.

The grill of a Cadillac is seen inside the showroom of the General Motors Corp.'s Harlem Auto Mall in New York April 7, 2009. REUTERS/Shannon Stapleton

Also on Wednesday, Daimler forecast 2009 sales would fall and struggling contract automaker Karmann said it had filed for insolvency.

General Motors Corp, which has until June 1 to complete a reorganization plan, is in “intense” and “earnest” preparations for a possible bankruptcy filing, the source said on Tuesday, sending its shares tumbling, to close down 11.89 percent.

Meanwhile in Europe, Daimler AG warned on Wednesday morning it expected a “considerable” drop in revenue in all of its automotive businesses this year and pushed back its expectations of when the industry might turn around into the second half. It also repeated that it would post a significant loss in the first quarter.

German Chancellor Angela Merkel’s cabinet on Wednesday approved an increase in funds for its car scrapping subsidy, which pays a cash bonus to exchange old cars for new greener models, to 5 billion euros ($6.60 billion), a government official familiar with the decision told Reuters.

The move came a day after the European Investment Bank approved 866 million euros ($1.14 billion) of loans to several automakers, including Volkswagen AG, Nissan Motor Co Ltd and Jaguar Land Rover to help them develop and build more fuel-efficient vehicles in Europe.

The money is part of a 7 billion euro package to the industry the European Union’s lending arm expects to complete in the first half of this year.

Also on Wednesday, industry body data showed a deepening decline in demand for new cars in Russia, with sales plunging 47 percent in March year on year, compared with a 38 percent fall in February.

By 1044 GMT (6:44 a.m. EDT) the DJ Auto Stoxx European index was up 3 percent.

GM BANKRUPTCY INEVITABLE?

As Europe came to the aid of automakers, worries about the impact of possible automaker bankruptcies in the U.S. are widening and Canadian Industry Minister Tony Clement said on Tuesday the government must be prepared for GM or Chrysler to enter bankruptcy protection.

Clement said Canada would guarantee the warranties of cars sold by GM and Chrysler, regardless of whether the automakers go into bankruptcy protection.

GM, operating with $13.4 billion of government loans since the start of the year, is under pressure to cut unsecured debt by two-thirds and make half of its remaining payments into a union healthcare trust in equity to preserve cash. The government has warned the alternative would be bankruptcy.

A plan to split GM into a “new” company made up of its most successful units and an “old” company of unprofitable units, is gaining momentum and is seen as the most sensible configuration, said a source familiar with the talks.

Moody’s Investors Service said on Tuesday that GM and Chrysler have a 70 percent chance of bankruptcy due to the difficulty of winning deep concessions from creditors out of court.

“Given the lack of progress achieved and the additional progress that will be required in the revised plans, this threat will need to be seen as credible in order to compel adequate movement on the part of stakeholders,” Moody’s said.

Chrysler, owned by Cerberus Capital Management LP, also faces possible bankruptcy. Chrysler has until April 30 to complete an alliance with Italian automaker Fiat.

In Asia, South Korea’s cash-strapped sport utility vehicle maker Ssangyong Motor announced plans to slash its workforce and sell idle assets in a bid to ensure its survival.

Vietnam’s first-quarter car sales slumped 36 percent on higher taxes and the economic slowdown, an industry report said.

But China vehicle sales for March could hit a record high, the official Shanghai Securities News said on Wednesday.

($1=.7582 Euro)