U.S. rejects auto-rescue plans, world markets tumble

NEW YORK (Reuters) - U.S. President Barack Obama rejected restructuring plans from General Motors (GM.N) and Chrysler on Monday and three European governments came to the aid of struggling lenders, sending markets tumbling on renewed worries about the health of the global financial system.

A White House task force rebuffed restructuring plans and pleas for billions in funding from the two automakers, and forced GM Chief Executive Rick Wagoner to quit.

Obama said Wagoner's departure was a recognition that the company needed new direction, but he added that the government did not want to take charge of GM.

"What we are interested in is giving GM an opportunity to finally make those much needed changes that will let them emerge from this crisis a stronger and more competitive company," Obama said.

"We cannot, we must not, and we will not let our auto industry simply vanish. But we also cannot continue to excuse poor decisions," he said.

GM will get funds to keep operating for 60 days, but new loans it is seeking amounting to as much as $30 billion will be on hold until it reworks its restructuring plan.

Chrysler, controlled by Cerberus Capital Management CBS.UL, was told to complete a planned alliance with Italy's Fiat (FIA.MI) within 30 days or risk liquidation.

Chrysler's CEO Bob Nardelli said later that his company had reached an agreement on a framework for an alliance with Fiat that has the support of the U.S. Treasury, which could invest another $6 billion.

"The problems that GM faces today in my opinion are significantly exacerbated by the recession, and this is a reminder of the cost of trying to repair the economy," said Jim McDonald, chief investment strategist at Northern Trust in Chicago.

The White House's unexpectedly emphatic rejection of the automakers' plans and further trouble for banks in Europe sent world stocks tumbling and lifted government bonds.

The Dow Jones industrial average, which had added nearly 7 percent the previous week, tumbled 3.3 percent .N after stock market falls in Europe .FTEU3 and Tokyo .T that sent the MSCI all country index down more than 4 percent to a one-week low. GM shares tumbled 25.4 percent.

U.S. crude oil futures slid 7.58 percent to $48.41 a barrel, a loss of $3.97, but the dollar, yen and U.S. Treasury prices rose as fears of bankruptcy for automakers and worries about banks worldwide spurred safe-haven buying.

LOW EXPECTATIONS FOR SUMMIT

The market gyrations came as British Prime Minister Gordon Brown prepared to host a summit of G20 leaders beginning on April 2 in London.

Leaders of the biggest economies will commit to pursuing economic policies that do not hurt each other, according to a draft communique obtained by Reuters.

But officials acknowledged the summit would fall short of a major overhaul of the world economy.

Wagoner's departure from GM marked only the second time since the financial crisis began last year that the U.S. government has forced a CEO from his job.

American International Group (AIG.N) boss Robert Willumstad was ousted last September.

The government's role in removing Wagoner raised questions, particularly for U.S. banks that have received large bailouts.

"The worst part about this is anyone else who may need government assistance or help realizes that they are in for it, the government will put a heavy hand and tell you what to do," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

"And when government gets involved, most of the time, it's inefficient," he said.

French autos group PSA Peugeot Citroen (PEUP.PA) CEO Christian Streiff also lost his job when his board sacked him on Sunday, citing a need for change to tackle an unprecedented slowdown for the industry.

Obama sought to reassure potential car buyers that possible restructurings through bankruptcy by GM and Chrysler would not affect auto purchases or put an automaker's warranty at risk.

"In fact, it will be safer than it's ever been because starting today, the United States government will stand behind your warranty," Obama said.

GM and Chrysler received $17.4 billion in bailouts in December. The U.S. auto industry, including dealers and suppliers, has cut 400,000 jobs over the past year.

IRELAND DOWNGRADED

Governments have focused most of their energy on fixing the financial sector, at the heart of the crisis.

But Ireland was dealt a blow on Monday when ratings agency Standard & Poor's cut the country's prized AAA credit rating to AA-plus and warned it could drop more.

The Bank of England was also forced into action, organizing a takeover of Scottish building society Dunfermline and providing 1.6 billion pounds ($2.27 billion) to back the deal.

Dunfermline's core operations will be taken over by the UK's largest building society, Nationwide, which has now gathered in three smaller rivals. The Bank of England set up a bridge bank to safeguard the lender's social housing business.

Spain, among Western Europe's hardest hit economies, over the weekend rescued its first bank since the crisis began.

The Bank of Spain unveiled a plan including 9 billion euros ($11.8 billion) in guarantees to bail out regional savings bank Caja Castilla la Mancha.

Germany also took action, agreeing to buy an 8.7 percent stake in stricken Hypo Real Estate HRXG.DE as a prelude to acquiring full control. Hypo shares closed 31 percent higher.

($1=.7601 Euro)

(Writing by Brian Moss; Additional reporting by Reuters correspondents in New York, Detroit, Paris, Tokyo and Hong Kong; Editing by Anthony Barker, Steve Orlofsky, Gary Hill)