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DETROIT/WASHINGTON (Reuters) - Chrysler LLC's CBS.UL biggest lenders and the U.S. government reached a breakthrough framework deal to cut the automakers' debt by $6.9 billion, but bankruptcy still loomed as a strong possibility to complete restructuring, officials said on Tuesday.
Although Chrysler allies were buoyed by the development, the near-term future of the American icon hinged on several parts coming together, before Thursday's U.S. government deadline, to prove that the company can be viable again.
"We don't want to prejudge the outcome. There is still someway to go in the negotiations, so I would not rule anything in or out," White House spokesman Robert Gibbs said after the administration confirmed the deal with most of Chrysler's primary debtholders.
Chrysler employs more than 40,000 factory and salaried employees. The company has been racing to overhaul its cost structure and secure the lone option the Obama administration believes is workable -- an alliance with Italy's Fiat SpA FIA.MI.
Fiat's Chief Executive Sergio Marchionne was quoted by the president of the Canadian Auto Workers (CAW) late on Tuesday as saying that Chrysler would likely enter Chapter 11 bankruptcy for a period.
"There's still a lot of work that needs to be done," the CAW's Ken Lewenza paraphrased Marchionne as saying.
U.S. officials, including Sen. Carl Levin of Michigan, told Reuters that a bankruptcy filing, if needed, would be launched with survival in mind.
"If they do go into bankruptcy, it would really be in and out," Levin said in Washington.
One source with senior-level knowledge of the Chrysler restructuring said that a surgical bankruptcy could be a way, for instance, to address any "recalcitrant" lenders.
Brian Johnson, an analyst with Barclays Capital, said it was becoming "increasingly clear that Chrysler will be restructured and avoid liquidation."
The deal reached with major banks late on Monday would wipe out $6.9 billion in Chrysler debt in exchange for $2 billion in cash but no equity in a new company, according to the source.
Chrysler's more than 40 lenders were performing due diligence on the terms, another source with knowledge of the banks' review said.
Shares of GM, also trying to avoid bankruptcy under a government-supervised restructuring, closed down 11.3 percent at $1.81 on the New York Stock Exchange. Shares of Ford, which has not sought government assistance, closed up 1.6 percent at $5.19.
Chrysler is privately controlled by Cerberus Capital Management.
Further details on the high-stakes Chrysler debt restructuring deal were not immediately available. Chrysler declined to comment and representatives for the lenders could not be reached for comment.
U.S. Rep. Gary Peters, whose Michigan congressional district is home to Chrysler's headquarters, urged the debt holders to accept the deal. "The remaining debt holders should understand that this deal is better than what they could expect in bankruptcy," he said.
The development with lenders came after a weekend agreement between Chrysler and the United Auto Workers to modify the union's labor contract and reduce the amount of money Chrysler would need to contribute to a retiree healthcare trust.
The UAW would end up owning 55 percent of the automaker under the concessionary contract. Members must vote on it by Wednesday night. The CAW ratified a deal with Chrysler last the weekend.
Fiat would "eventually own" 35 percent of Chrysler stock, according to a UAW document distributed to Chrysler hourly workers, if the alliance was consummated.
Fiat's deal with Chrysler would be decided close to the Thursday deadline, Fiat Vice Chairman John Elkann said on Tuesday.
Chrysler has been kept afloat with $4 billion in federal loans since the start of the year and could get another $500 million to complete its restructuring. It is expected the government would provide any bankruptcy financing.
GM has received $15 billion in government subsidies and could tap another $3 billion before its June 1 deadline to prove it can survive on its own.
Reporting by Poornima Gupta and Caren Bohan; Additional reporting by Jui Chakravorty in New York, Glenn Somerville and John Crawley in Washington, Nick Carey, Kevin Krolicki and David Bailey in Detroit, John McCrank in Toronto, Christian Hetzner in Frankfurt and Gianni Montani in Italy; Editing by Gerald E. McCormick, Patrick Fitzgibbons, Matthew Lewis