UPDATE 2-Axle works with law firm, mulls bankruptcy-sources

* American Axle working with law firm Shearman & Sterling

* Options under review include bankruptcy, GM aid-sources

* GM says open to working with troubled suppliers

* American Axle shares close down 8 percent

(Adds American Axle comment, details on GM relationship, GM comment)

By Jui Chakravorty Das and Soyoung Kim

NEW YORK/DETROIT, July 10 (Reuters) - American Axle & Manufacturing Holdings Inc (AXL.N) is working with legal advisers as it considers restructuring options including bankruptcy, two people familiar with the matter told Reuters.

The company, a key parts supplier to General Motors Corp GMGMQ.PK, is working with the law firm Shearman & Sterling as it considers debt restructuring options amid depressed auto sales and weak production, according to the sources.

Shares in the supplier fell 8 percent to $1.79.

American Axle, which has more than $1 billion in long-term debt, declined to comment on whether it would consider filing for bankruptcy.

Fitch rating agency cut American Axle's rating to CCC in April affecting $1.3 billion of debt.

The company has also reached out to GM for assistance, two sources briefed on the effort said, although it was unclear what form such aid could take.

The sources asked for anonymity because of the confidential nature of American Axle's restructuring efforts. Shearman &Sterling declined comment.

Earlier this week, American Axle said it had reached a new credit agreement with lenders that waives covenants under its revolving credit facility through July 30. It remains in talks with other lenders including JPMorgan Chase (JPM.N) and Bank of America. (BAC.N).

American Axle said its long-term relationship with Shearman & Sterling, which has included work on securities law and litigation, was broadened to include advice on restructuring.

"Shearman & Sterling is our outside legal counsel and one of the advisers and consultants advising on a comprehensive restructuring of our company," American Axle spokesman Chris Son told Reuters.

American Axle, like other U.S. auto parts suppliers, has been hit hard by production shutdowns at GM and Chrysler, along with the worst U.S. auto sales in nearly three decades.

CRUCIAL GM SUPPLIER

American Axle, which had 7,250 employees globally at the end of last year, supplies axles for GM's full-size pickup truck and SUV line.

GM Chief Executive Fritz Henderson said the new GM that emerged from bankruptcy on Friday would remain open to discusions with troubled suppliers, including American Axle.

"I don't expect the new GM will be different from the old GM in that regard," he told Reuters.

In 2008, a three-month strike against American Axle by workers represented by the United Auto Workers union shut down or partly idled about 30 GM plants due to parts shortages.

GM paid the supplier $175 million to fund worker buyouts.

The new GM is more than 60 percent owned by the U.S. government, and the White House-appointed autos task force would be involved in any decision on whether to help American Axle, one of the sources said.

During its waiver period, American Axle is required to maintain a daily minimum liquidity of $100 million.

American Axle said in June it expected sales for the second and third quarters to be reduced by about $300 million due to extended production shutdowns at GM and Chrysler.

(Additional reporting by Walden Siew in New York, Kevin Krolicki in Detroit; editing by Leslie Gevirtz)