WASHINGTON (Reuters) - The Bush administration said on Friday it could be willing to provide emergency aid to the teetering U.S. auto industry, keeping open the prospects for a bailout the day after Congress failed to approve a deal.

Warning of dire consequences for the recession-hit U.S. economy if the once-mighty automakers collapsed, the White House -- in a reversal of policy -- said it was ready to consider dipping into a $700 billion Wall Street bailout fund to help keep the companies afloat.

“The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry,” White House spokeswoman Dana Perino said.

Democratic leaders and the main U.S. auto workers union appealed to Bush’s Republican administration -- now in its final weeks before turning over to Democratic President-elect Barack Obama -- to provide emergency funds after a Senate deal to save Detroit’s Big Three collapsed in acrimony late on Thursday.

The failure of the $14 billion bailout plan in Congress sent markets reeling around the world. Shares in Toyota Motor Corp, the world’s biggest carmaker, lost a tenth of their value, and European automakers also closed sharply lower.

But signs that the White House and U.S. Treasury Department might mount a last-ditch effort to help the carmakers buoyed Wall Street.

Analysts say that without quick help, two of the country’s major car manufacturers -- General Motors Corp and Chrysler LLC -- could face bankruptcy. Ford is in slightly better financial shape but says it needs a major line of credit.

Polls show Americans split on bailing out the U.S. automakers, a highly visible troubled sector in a country grappling with recession. The auto companies say one in 10 jobs in the United States are linked to their industry.

But the companies are widely criticized for fighting tougher fuel efficiency standards and poor model designs that have left them with products losing popularity with consumers.

In response to the company’s many struggles, GM said it would cut its first-quarter North American production by 60 percent.

President George W. Bush can ill afford the failure of one or more of the automakers as he prepares to leave office on January 20 with a presidential legacy already battered by the grim economy and the unpopular war in Iraq.

Responding to the congressional impasse, the administration said it was considering tapping the Troubled Asset Relief Program (TARP) financial industry fund, whose use for an auto bailout it had earlier vowed to oppose.

“Given the current weakened state of the U.S. economy, we will consider other options, if necessary including use of the TARP program, to prevent a collapse of troubled automakers,” Perino said.

SPARE TARP MONEY

Democratic leaders welcomed signs that the White House wanted to throw the industry a lifeline, with Sen. Chris Dodd telling reporters “we still have an opportunity to do this and we have an obligation to try.”

The Connecticut senator said if the White House showed leadership on the auto issue, Congress might be more willing to approve the second part of the $700 billion Wall Street bailout fund, only half of which has been released to the administration so far.

But options remain limited. Of the $350 billion portion of the TARP that the Treasury is authorized to tap without returning to Congress, only $15 billion remains uncommitted.

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Treasury had pledged to pump $250 billion into banks, but so far has only disbursed $155.3 billion, with another $10 billion for Merrill Lynch on hold pending its merger with Bank of America.

Obama said he was disappointed at the failure to get the bill done and hoped the industry could get some temporary financing. The new president may well have to deal with the troubled auto sector early in his administration.

Even if GM and Chrysler secure a last-ditch loan from the Bush administration, analysts see continued uncertainty ahead. Both will be under intense pressure to cut new cost-saving deals with creditors and the main labor union at a time when U.S. auto sales are at their lowest level adjusted for population since World War Two.

A General Motors bankruptcy would deliver a huge punch to the economy and to the labor market.

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“It would significantly intensify the recession, it would make it deeper and it could also prolong it,” said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.

The United Auto Workers blamed the failure of the congressional bailout plan on Senate Republicans who want more wage concessions from the union. The UAW said it was now up to Treasury Secretary Henry Paulson to find a way to bail out GM and Chrysler, along with Ford Motor Co.

Thursday’s deal fell apart over proposed wage concessions by the UAW, including the date at which the autoworkers’ would accept pay parity with workers at foreign-owned U.S. auto plants. The Democrats hold a majority in the Senate but needed Republican support for the proposal to succeed.

A GLOBAL ISSUE

GM agreed the bailout’s rejection had made matters worse, though its German unit Opel was not affected.

Ford’s Volvo unit likewise sought to reassure investors, saying it was focused on a $3.1 billion bailout presented by the Swedish government, which also still requires approval by lawmakers.

Opel has already sought funding guarantees from the German government to help weather the devastating downturn in auto markets.

As the German government reiterated that any funding for Opel was conditional on none of it finding its way back to GM, auto industry association VDA said it still held hopes the U.S. Senate would make a second attempt to agree a package.

The Senate’s rejection was also felt by suppliers.

Finnish tire maker Nokian and Swedish airbag and seatbelt maker Autoliv cut their earnings guidance, and a source told Reuters parts manufacturer Continental might have to restructure its debt if the economy worsened.