UPDATE 3-Court delays decision on GM buy of Delphi unit

* Treasury holds up sale to review Delphi cash flow

* Judge extends protection period for Delphi until July 31 (Adds comment from Delphi)

By Phil Wahba and Tom Hals

NEW YORK, March 24 (Reuters) - A U.S. bankruptcy judge delayed his decision on the sale of bankrupt car parts maker Delphi Corp's DPHIQ.PK steering business to General Motors GM.N until next week, after the U.S. Treasury Department sought more time to review the deal.

The Treasury Department told Delphi lawyers on Monday night that it was premature to grant approval of the sale, which could be deemed a "material transaction" under the government's loan agreement with GM, a Delphi lawyer told the court Tuesday.

The lawyer for Delphi said the Treasury Department indicated it wanted to examine the company's cash flow further before lifting its objection.

On Tuesday, Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York postponed the hearing until April 2.

GM, itself fighting to avoid bankruptcy, has received $13.4 billion in emergency loans, giving the Treasury Department the right to review large transactions. The automaker has asked for up to $30 billion in government funds.

GM has agreed to increase the amount it has committed to advance to Delphi to $450 million from $300 million, contingent on completing its purchase of the steering unit.

Delphi bondholders last week objected to the deal, saying it could lead to a piecemeal sell-off of assets to GM that could jeopardize their ability to get "adequate consideration" in any future sale of other Delphi units, according to court papers.

"The Debtors should not simply give to GM everything it wants from them, as GM would then lose any incentive to assist the Debtors in emerging from Chapter 11 under a viable plan of reorganization," they said in a court filing.

Delphi, which filed for bankruptcy protection in 2005, said in early March that it was in default of its already amended credit facility, and the additional support from GM would give the company liquidity needed to survive through May.

In a statement Tuesday, Delphi said approval on April 2 "should facilitate the company's access to additional liquidity to manage its U.S. operations."

The two companies remain in talks aimed at shifting parts plants that mostly supply components for the automaker back to GM, both sides have said.

GM, which spun off Delphi in 1999, has taken more than $11 billion in charges to help the company's reorganization along.

Separately, the judge agreed to extend the exclusivity period, which protects Delphi from creditors wishing to impose a restructuring on it, until July 31.

The case is In re: Delphi Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 05-44481. (Reporting by Phil Wahba and Tom Hals; Editing by Steve Orlofsky, Lisa Von Ahn, Gary Hill)