General Motors stock fell sharply in Frankfurt on Tuesday on renewed bankruptcy fears, weighing on autos stocks across the region, as peer Chrysler pinned its hopes on a tie-up with Fiat .

Abu Dhabi's government-linked investment fund Aabar , a leading GM investor, on Friday ruled out buying more shares in Daimler or a stake in GM's Opel unit.

This was followed on Sunday by a report in the New York Times that the U.S. Treasury Department was directing GM to lay the groundwork for a bankruptcy filing should it fail to agree debt-for-equity deals with stakeholders by the deadline set by the Obama administration two weeks ago.

The news sent GM stock down 17 percent in early Frankfurt trade after a 16 percent fall in U.S. trade on Monday.

By 1111 GMT (7:11 a.m. EDT), the stock had recovered slightly to trade down 10.39 percent, against a 2.34 percent gain in the wider DJ Stoxx European Autos index <.SXAP>.

Asian stocks also suffered on fears of a GM bankruptcy. Japan's Nikkei average fell 0.9 percent as worries spurred investors to lock in profits on auto shares.

GM, which is operating with $13.4 billion in emergency federal loans, has until June 1 to win sweeping concessions from bondholders and the United Auto Workers union.

GM, which sources familiar with the situation told Reuters last week was in intense and earnest preparations for a possible bankruptcy filing, declined to comment on the newspaper report on Monday.

In spite of the investment uncertainty, GM's new CEO, Fritz Henderson, told Automotive News in an interview published on Tuesday that March sales had been in line with its modest expectations.

You saw a traditional seasonal upswing, albeit at a low rate of 9, 8 or 10 (million annual U.S. sales). But that was good to see, not great, but it was good to see.

Henderson also said GM was starting to see some resumption of credit to the consumer.

Fellow struggling U.S. carmaker Chrysler , meanwhile, was reported by Automotive News on Monday to be in discussions with Fiat about an alliance that could see the latter take a stake in Chrysler.

The Wall Street Journal also reported that Chrysler's creditors plan to make a counteroffer to the U.S. Treasury this week, in which they may ask for equity in a firm combining Chrysler and Fiat, in exchange for concessions.

CHINA BOOST

In Asia, China's incentives to boost car sales appeared to be bearing fruit, as Germany's Volkswagen said it sold 9 percent more cars in mainland China and Hong Kong in March, setting an all-time record for monthly sales.

Elsewhere, the UK's Sunday Telegraph newspaper reported that Chinese carmaker SAIC Motor Corp <600104.SS>, GM's China partner, has requested a sale document from Commerzbank, which is orchestrating the spin-off from GM of a unit made up of Germany's Opel and the UK's Vauxhall Motors.

The China Securities Journal had on Friday quoted SAIC president Chen Hong as saying the company was focused on expanding its domestic market share and had no plans for foreign mergers and acquisitions, although it would continue to monitor the global car market and seek suitable development opportunities.

The Sunday Telegraph said Geely Automotive has also asked for information from Commerzbank. Opel and Vauxhall are also seeking state loan guarantees worth up to 3.3 billion euros ($4.36 billion) from European governments to survive.

UK SCRAPPAGE

The UK government said over the weekend that it was still considering a car scrapping scheme similar to those launched in France and Germany, in spite of a report in The Times newspaper of a rift between Business Secretary Peter Mandelson and finance minister Alistair Darling, who was said to be blocking the idea.

Shares in British car dealers jumped on Tuesday on hopes the government would take steps to boost the industry.

Britain's Society of Motor Manufacturers and Traders (SMMT), which had called last year for a scrapping incentive as well as other measures to help the industry, told Reuters in an interview last week that it expected help from the government when it reports its annual budget.

($1=.7574 Euro)

(Reporting by Eva Kuehnen, Maria Sheahan, Stanley Carvalho, Fang Yan, Jacqueline Wong, Anupreeta Das, Soyoung Kim and John Bowker; Writing by Helen Massy-Beresford; editing by Simon Jessop)

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