UPDATE 1-Fitch downgrades Chrysler, outlook negative

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DETROIT, July 29 (Reuters) - Fitch Ratings downgraded Chrysler LLC's debt further into the junk category and warned that the struggling U.S. automaker could face difficulties in financing unless U.S. auto sales recovered in 2009.

Chrysler, which lost $1.6 billion in 2007, could struggle to finance operations in the second half of 2009 if industry volumes remained at this year's depressed levels or dropped further, according to a Fitch report released on Tuesday.

Fitch, which cut Chrysler's ratings from B- to CCC, just two notches above default, said the decision last week by Chrysler's finance arm Chrysler Financial to stop financing vehicle leases for U.S. consumers would depress already sluggish sales.

It rated Chrysler's outlook as negative, indicating a further rating cut is likely in the next six months.

The prospect of higher borrowing costs for Chrysler Financial also raises the likelihood that Chrysler will not be able to maintain competitive financing offers in a tough U.S. market, the ratings agency said.

Chrysler Financial's $30 billion credit facility, used to finance the automaker's vehicle sales, is up for renewal in early August and analysts have said the lender could see higher borrowing costs amid the continuing credit market turmoil and a deepening slump in U.S. vehicle sales.

"The higher costs associated with any renewal will make it more challenging to provide competitive and economic financing of retail sales," Fitch said.

U.S. sales for Chrysler, controlled by Cerberus Capital Management [CBS.UL], are down 22 percent so far this year. U.S. auto sales have dropped to their lowest level in 15 years, and the premium on fuel efficiency in the face of record gasoline prices has convinced many consumers to abandon trucks and SUVs. (Reporting by Soyoung Kim, editing by Gerald E. McCormick)