General Motors Corp said Friday it will drop about 1,600 U.S. dealers as it struggles to slash billions of dollars in operating costs and debt ahead of an anticipated bankruptcy filing by the end of the month.

Taken together with a similar announcement by bankrupt Chrysler LLC a day earlier, over 2,300 U.S. auto retailers have been put on notice that they are being eliminated by the two embattled automakers.

The unprecedented closures taken under the direction of the Obama administration put over 100,000 jobs at risk across the United States and show the spreading economic pain from the collapse of the two Detroit-based automakers.

GM said it plans to drop about 1,100 of its smaller and less profitable dealerships by letting their franchise agreements expire when they come due in October 2010.

The automaker also expects to get rid of another 470 dealerships from cutting its Saab, Hummer and Saturn brands.

GM has been phasing out its Pontiac brand and has less than 100 stand-alone Pontiac dealerships remaining.

After other dealerships fold or merge in coming months, the plan is for GM to end up with about 3,600 showrooms by the end of next year for its Chevy, Cadillac, Buick and GMC brands.

That would represent a 40-percent reduction in GM's far-flung dealership network that has been protected until now by a patchwork of state franchise laws that made automakers slow to drop dealers.

GM spent more than $1 billion to close its Oldsmobile division and shut down some 2,800 dealerships earlier this decade, an experience that made it reluctant to take on its widely recognized problem of having too many dealers competing for a shrinking share of U.S. auto sales.

This time, GM is not offering dealers any compensation, and the risk of a drawn-out legal battle is another reason analysts believe it will follow Chrysler into a bankruptcy filing.

They may want to take legal action. We will have to see, GM sales chief Mark LaNeve said of the dealers.

He added: I can tell you that without a filing these will be hard to enforce.

GM dealers targeted for closure were notified on Friday morning by letters sent overnight via Federal Express. Other GM dealers learned they had been spared when no letter arrived.

It's kind of like 'Dancing with the Stars', said Richard Genthe, a Chevrolet dealer in Southgate, Michigan. You're safe. You get to go ahead into next week.

The U.S. Treasury Department, where a team of officials led by former investment banker Steve Rattner has been overseeing the GM and Chrysler restructuring plans, said the job losses from the dealer closures could have been worse.

Without the president's intervention, the entire GM and Chrysler dealer networks could have been lost, the statement said. The administration's commitment to this industry has given both companies a new lease on life.

The elimination of U.S. dealerships, and the jobs that go with them, was an anticipated but painful part of the U.S. auto industry shake-up following the collapse in U.S. auto sales to less than 10 million vehicles a year from more than 16 million just two years ago.

GM shares were down 6 cents or 5 percent at $1.09 in afternoon trading. The shares traded as high as $21.37 last May.

CHRYSLER CUTS

Chrysler, which filed for bankruptcy on April 30, plans to terminate 789 of its 3,181 dealerships by early June, a move that could cost up to 40,000 jobs.

Dealers in Pennsylvania, Texas, Ohio, Illinois and in Michigan -- where Chrysler is based -- would be hit hardest.

GM said it would not disclose the identity of individual dealers slated for closure. Chrysler disclosed in court documents on Thursday the identities of nearly 800 dealerships it wants to terminate under the court process.

GM remains out of bankruptcy but has said that a filing is likely because of its need to cut $27 billion in bond debt and other costs.

Chrysler on Friday sought to ease some of the industry-wide jitters when Chief Executive Robert Nardelli said the company would begin paying its suppliers for invoices that had been sent prior to its filing for Chapter 11 protection.

Nardelli also said the company was moving ahead with plans to establish contractual relationships between the new carmaker being formed with Italy's Fiat SpA and suppliers.

He also said reports that the company's executives have found a loophole that would help them avoid pay limits mandated by the U.S. government were false.

I want to assure you that these reports are absolutely, positively incorrect, he said in a memo to staff that was obtained by Reuters. Chrysler understands the limitations on compensation for senior executives during the term of the government loans.

The dealer cuts were greeted with surprise in some quarters, and with anger and sadness in others.

Mark Calisi, 47, who owns Eagle Auto-Mall in Riverhead, New York, said he was devastated to learn that his dealership would be closed. He said Chrysler accounts for a third of his business, which also sells Volvo, Mazda and Kia vehicles, and on Thursday he had to sack 30 of his 100 employees.

I have been with Chrysler for 13 years and my father was with Chrysler for 30 years, he said. No matter which way you cut the cake, it's devastating.

While GM continues to shrink its operations, the company continues to talk with its largest union, the United Auto Workers, about a deal to slash employee costs.

Under the direction of the U.S. Treasury, GM is said to be close to a deal with the UAW that would cut its hourly labor costs by more than $1 billion a year, the Wall Street Journal said, citing people familiar with the matter.

GM expects to halve its remaining cash outlays for retiree health costs to about $10 billion, and supplement that contribution with a 39 percent equity stake in the reorganized company, the people told the paper.

(Additional reporting by Poornima Gupta, Soyoung Kim and James Kelleher; editing by Patrick Fitzgibbons and Gerald E. McCormick)

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