WRAPUP 3-Europe gives auto loans; GM preps for bankruptcy

* EIB grants 866 million euros of loans for carmakers

* GM in 'intense' preparations for bankruptcy - source

* Shares of GM down 13 pct, bonds fall

* Germany to increase funding for auto subsidy

* BMW, Mercedes-Benz March sales fall
(Adds German expansion of auto subsidy, European share index)

By Soyoung Kim and Christiaan Hetzner

DETROIT/FRANKFURT, April 7 (Reuters) - Europe approved $1.2
billion of loans to support the region's struggling automakers
on Tuesday, even as preparations intensified for a possible
bankruptcy at General Motors Corp (GM.N) due to lack of
progress in restructuring the ailing company.

GM, which has until June 1 to complete a reorganization
plan, is in "intense" and "earnest" preparations for a possible
bankruptcy filing, a source familiar with the company's plans
said, sending its shares down 13 percent. [ID:nN07463416]

The European Investment Bank approved 866 million euros of
loans ($1.17 billion) to several automakers, including
Volkswagen AG (VOWG.DE), Nissan Motor Co Ltd (7201.T) and
Jaguar to help them develop and build more fuel-efficient
vehicles in Europe. [ID:nL7150140]

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. The bank lent money to German,
Italian, French and Swedish automakers in March.

Providing additional support, Germany's coalition government
has agreed to increase funds for its program aimed at
encouraging drivers to ditch old cars for new ones to 5 billion
euros ($6.77 billion) from 1.5 billion, a government spokesman
said. [ID:nBAT002840] The subsidy would run until the end of
2009 at the latest, the spokesman told Reuters.

The series of measures to support the industry came as
several German automakers reported lower March sales which
underscored the severity of the global downturn in auto sales
triggered by an economic recession.

Germany's BMW (BMWG.DE) said its global vehicle sales fell
17.2 percent in March and global unit sales for Daimler AG's
(DAIGn.DE) luxury Mercedes-Benz brand were down 16 percent.
[ID:nWEA6287]

The DJ Stoxx European Auto Index .SXAP ended down 2
percent, paring earlier losses of as much as 4 percent.

GM BANKRUPTCY INEVITABLE?

Worries about the impact of possible automaker bankruptcies
are widening and Canadian Industry Minister Tony Clement said
on Tuesday the government must be prepared for GM or Chrysler
to enter bankruptcy protection. [ID:nN07471512]

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.
[ID:nN07463416]

GM shares fell nearly 13 percent, or 29 cents, to $1.98.

GM's bonds were steady to slightly lower in late morning
trading. GM's benchmark 2033 bond slipped, with the 8.375
percent bond trading at 12 cents, compared with 12.75 cents
before the news came out, according to MarketAxess data. The
bonds closed at about 11 cents on Monday, according to
MarketAxess data.

Moody's Investors Service said GM and Chrysler have a 70
percent chance of bankruptcy due to the difficulty of winning
deep concessions from creditors out of court. [ID:nN07460037]

"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 [CBS.UL],
also faces possible bankruptcy. Chrysler has until April 30 to
complete an alliance with Italian automaker Fiat (FIA.MI).
(Reporting by Soyoung Kim and Christiaan Hetzner; Additional
reporting by Helen Massy-Beresford, Chelsea Emery, Jan
Strupczewski, Matthias Sobolewski, David Bailey; Editing by
Andre Grenon and Matthew Lewis)