UPDATE 2-US Treasury not negotiating aid for GM merger

(Adds details on loan program, corporate lobbying)

By David Lawder

WASHINGTON, Oct 30 (Reuters) - The U.S. Treasury Department is not negotiating with General Motors Corp (GM.N) and the owners of Chrysler LLC on a request to provide direct government aid to their proposed merger, a Bush administration official said on Thursday.

Instead, the administration is working to speed the distribution to automakers of $25 billion in factory retooling funds authorized by Congress last month, the official told Reuters.

Earlier this week, industry sources said GM had asked for roughly $10 billion in an unprecedented government rescue package to support its acquisition of Chrysler from Cerberus Capital Management [CBS.UL].

The request was viewed as over and above the $25 billion in funds to enable the automakers to produce fuel-efficient vehicles.

"Treasury is not negotiating with the automakers, the administration is working to get the $25 billion Congress already authorized to the industry," the official said.

A GM spokesman had no immediate comment.

The Treasury did confirm that automakers' financial companies, such as GMAC LLC and Chrysler Financial, would qualify to sell distressed assets to the Treasury when it launches reverse auctions under its $700 billion market bailout plan.

However, the finance arms would have to be registered as federally regulated bank holding companies for them to qualify for a capital injection under the $250 billion equity purchase portion of the program.

GMAC said on Thursday it was seeking the bank holding company designation.

GM has been lobbying for Treasury help and outside pressure on the government grew earlier on Thursday. Governors of Michigan and five other states urged the Treasury and the Federal Reserve to help the distressed U.S. auto industry.

GM, Ford Motor Co (F.N) and Chrysler have faced increased scrutiny over their cash positions by creditors and investors who have questioned whether they have the liquidity that they need to ride out a severe slump in U.S. auto sales seen continuing through 2009.

Without federal assistance, the pressure from increased unemployment claims and diminished tax revenue from the "economic crisis" facing automakers "threatens to create an unmanageable disaster at the state level," the letter said.

Michigan's congressional delegation, led by House of Representatives Energy and Commerce Committee chairman John Dingell, has been lobbying the Bush administration hard to free up liquidity for industry. They suggested that direct capital injections might be appropriate.

The $25 billion in loans approved by lawmakers last month are dedicated to helping Detroit meet a government mandate to make more fuel efficient vehicles.