UPDATE 3-GM, Cerberus step up Chrysler sale talks -sources

(Adds GM executive team involvement, share price decline)

By Jui Chakravorty Das and Kevin Krolicki

NEW YORK/DETROIT, Oct 24 (Reuters) - General Motors Corp GM.N has intensified talks to buy Chrysler LLC's auto operations from Cerberus Capital Management in a deal that would also involve a transfer of ownership of GMAC, people familiar with the talks said on Friday.

GM intends to seek U.S. government aid to support any deal, the sources said, potentially injecting a polarizing and urgent question of economic policy into the final stretch of the presidential campaign.

Cerberus, the private equity firm that controls Chrysler, also remains in talks with other parties, including Nissan Motor Co Ltd (7201.T), about a deal for the struggling automaker.

GM, Cerberus and Chrysler declined comment.

But the GM talks are the most advanced and involve at a working level GM Chief Operating Officer Fritz Henderson and senior Cerberus representatives, sources said.

Chrysler Chief Executive Bob Nardelli and GM Chief Executive Rick Wagoner remain in close contact with negotiators, they said.

Cerberus, which owns 51 percent of former GM finance arm GMAC, is interested in an increased stake in the unit, sources said. GM has 49 percent of GMAC at present after selling a controlling stake to the private equity firm for $7.4 billion in a 2006 deal.

Cerberus is also interested in offloading the auto operations, but would like to have a significant stake in the combined company, the sources said.

Both parties remain interested in reaching a deal, but GM is working to clarify Chrysler's pension liabilities and the risk the automaker's suppliers could face from a merger, the sources said.

Analysts and others close to the talks have suggested that 30 percent of Chrysler's current suppliers could be at risk if GM completed an acquisition and worked to cut Chrysler's slower-selling and weaker models.

GM is also considering contingency plans in case the Cerberus talks fail to produce a deal, sources said.

Those alternative scenarios include approaching an outside investor and asking the government for stepped-up assistance of some kind, one person briefed on the talks said. GM has lost more than $50 billion in the last three years.

With auto sales slowing sharply in Western Europe and on track to drop to near 18-year lows in the United States this month, GM is under increasing pressure to slow a cash burn rate that stood at $3.6 billion in the second quarter and is expected to have accelerated since.

A major motivation for GM to acquire Chrysler has been access to the smaller automaker's remaining cash, sources have said. Chrysler lost about $1 billion in the first half of the year and ended June with $11.7 billion.