The Wall Street crisis has finally found its way to Motown, that could well see the Big Three become the Big Two, with reports saying that General Motors has been in preliminary merger talks with private equity firm Cerberus Capital Management that owns a 79-per cent stake in rival Chrysler, for a possible deal.

A deal betwen the two could reshape the US auto industry, reducing the number of heavy weights in the industry from three to two.

GM's discussions have been on for around a month with Cerberus Capital Management LLC, which also owns 51 per cent in GMAC, an 89-year-old auto lender.

The Wall Street Journal reported that Cerberus has proposed a swap in which GM would acquire Chrysler's automotive operations, while it would in turn give the remaining 49 per cent stake of GMAC to Cerberus.

Last month Cerberus was reported to have approached Daimler AG for acquiring the remaining stake in Chrysler. Daimler still holds around 19.9 per cent in Chrysler, after it sold 80.1 per cent to Cerberus over a year ago. Daimler' had acquired Chrysler in 1998 for $36 billion. The German Manager- Magazin had reported that Daimler would like to offload its Chrysler stake in the coming weeks.

Daimler had issued a statement confirming that it was in discussions with Cerberus ''regarding the redemption of its remaining 19.9-per cent stake in Chrysler LLC.''

DaimlerChrysler had put its struggling US auto unit up for sale in February 2007 after Chrysler posted a loss of nearly $1.5 billion for 2006 on dwindling sales of its mainstay light trucks, bringing to an end the nine-year-old tale of a possible merger between US brands Jeep, Dodge and Chrysler and Germany''s Mercedes amidst restructuring by the US auto industry.

In August 2007, DaimlerChrysler had completed the sale of almost 80-per cent stake in Chrysler to a subsidiary of buyout group Cerberus Capital. In July 2007 the European Commission approved the $7.4-billion deal, which marked the first time a private equity company had acquired one of the world''s biggest automakers.

Now, however, GM is reported to have been in talks with Cerberus Capital Management for almost a month, though negotiations are reported to be rather preliminary, and nowhere near close to a deal. Reports in the media suggest that the chances for a merger to come about were around ''50-50'', that too after weeks more of discussion, if at all the deal comes about.

A day ago, a report by Standard and Poor's had cautioned that falling sales and a slowing economy were likely to drive auto majors like General Motors Corporation, Ford Motor Co and Chrysler LLC into bankruptcy. (See: GM, Ford may drive into bankruptcy: S&P) The rating agency had also placed General Motors on its negative credit watch on Thursday. 

The New York Times, citing unnamed sources, reported that General Motors was talking to Ford Motor Company as well in addition to Chrysler, for sharing vehicle platforms with the latter and co-developing engines with the former.

Prospects for the US auto industry look increasingly grim, on the back of a softening economy, and the relative non-availability of easy credit that funded most car purchases in the US till a few months ago.

The industry has posted its worst auto sales record in the United States in 15 years,  that has put immense pressure on all auto makers to cut costs beyond the production capacity rollbacks and plant closures that have already come about.

High gas prices have all but killed the market for the earlier hugely profitable portfolio of sports utility vehicles (SUVs). GM and Chrysler have been stuck with inventory and product lineups that are completely opposed to the existing consumer demand for smaller, more fuel-efficient cars.

According to reports Ford Motor Company too has been mulling a probable sale of shares from its controlling stake in the Japanese Mazda Motor Co. Simultaneously, it also reported that Cerberus was also in talks to sell Chrysler to other automakers including Nissan and Renault.

There has been considerable speculation about a possible bankruptcy filing by GM on account of the company's cash reserves starting to dry up. GM had $21 billion in cash at hand at the end of the second quarter, and was reported to be burning over $1 billion a month.

Financial weekly Barron's reported that GM was doing the groundwork to approach the US Federal Reserve for borrowing money from its discount window, on account of the chaos in the financial and credit markets that had eliminated other borrowing options for the company.