The Obama administration seized the wheel of the failing U.S. auto industry on Monday, forcing out General Motors Corp's CEO, pushing Chrysler LLC toward a merger and threatening bankruptcy for both.

The moves came after Europe's second-biggest carmaker by sales PSA Peugeot Citroen ousted CEO Christian Streiff, replacing him with former Corus head Philippe Varin from June 1.

GM shares plunged around 20 percent in Frankfurt after steps outlined by the White House autos panel -- headed by former investment banker Steve Rattner -- marked a stunning reversal for management at both GM and private equity-owned Chrysler and took aim at GM creditors who had bet on its rescue.

In France PSA Chairman Thierry Peugeot said in a statement the exceptional difficulties faced by the industry warranted a change in management, but Streiff defended himself saying his policies had equipped the group to weather the storm.

The Obama administration pledged only to fund GM's operations for the next 60 days while it develops a more sweeping restructuring plan, instead of granting GM's request for up to a further $16 billion in loans.

GM CEO Rick Wagoner, who had presided over the company's rapid decline in the past five years and had run the automaker since 2000, was forced out effective on Monday at the request of Rattner. A majority of GM's board will also be replaced.

UNDER FIRE

Wagoner and GM President and Chief Operating Officer Fritz Henderson was named as new CEO. Wagoner's forced resignation came as the Obama administration comes under fire for not blocking bonuses to executives at American International Group Inc.

It was only the second time that the U.S. government has forced the ouster of a CEO in a bailout since the financial crisis began last fall. Robert Willumstad lost his job at the helm of AIG in September in connection with the U.S. government's then $85 billion rescue of the giant insurer.

Most analysts had expected the administration to take a softer line with GM and Chrysler after it had signaled its intent to protect jobs for the 160,000 U.S. workers employed by the companies.

In Europe, auto stocks fell on concerns about the broader industry impact of the failure of a major U.S. producer. The DJ Stoxx European autos index fell 4.1 percent by 0731 GMT, while Fiat SpA fell 4.5 percent and PSA Peugeot Citroen fell 4.5 percent, although the management change was seen as a positive move for the company.

The fact that there's still a chance of GM going bankrupt is shocking, said Takashi Ushio, head of the investment strategy division at Marusan Securities in Japan.

Chrysler, controlled by Cerberus Capital Management, was given 30 days to complete an alliance with Fiat or face a cut-off of its government funding that could force its liquidation.

The autos panel rejected a claim by Cerberus that Chrysler could be viable on its own, citing its relatively small size, weak product line-up and declining U.S. market share.

AGGRESSIVE RESTRUCTURING

If Chrysler can complete a tie-up with Fiat and cost-saving deals with creditors and its major union, the Treasury would consider investing up to another $6 billion, officials said.

U.S. officials said there had been progress in recent negotiations involving the task force. Fiat has agreed to take less than the 35 percent stake in Chrysler the two companies had first negotiated, the senior official said.

Meanwhile, Henderson, a key architect of GM's now-rejected turnaround plan, was charged with working with U.S. officials and advisers to develop a more aggressive restructuring.

We believe our approach to GM is starting with a clean sheet of paper, the senior official said.

GM bondholders, the official said, could have to take less than the 33-cent-on-the-dollar payout they have been offered and should abandon hope of a government guarantee for their investment.

The Obama administration had also not ruled out a quick bankruptcy process for either GM or Chrysler, he said.

Wagoner had been outspoken in his opposition to a Chapter 11 reorganization, saying it would drive away consumers and probably lead to GM's liquidation.

GM had asked for more than $16 billion in new government loans, while Chrysler wanted $5 billion to ride out the weakest market for new cars in almost 30 years.

Obama last week cited mismanagement over the years for some of the auto industry's severe financial problems, a barb aimed at Wagoner since his counterparts at Ford Motor Co, Alan Mulally, and Chrysler, Bob Nardelli, are relative newcomers brought in from outside the industry.

GM has lost about $82 billion since 2005 when its problems began to mount in the U.S. market. GM stock has also lost about 95 percent of its value since Wagoner took over as CEO.

Wagoner inherited many of GM's deeper problems but critics say he failed to move quickly enough.

GM lost its footing in the late 1970s and the board didn't seem to notice for another 20 years. Rick made a lot of decisions, but they came too late, said John Casesa, a managing partner at consulting firm Casesa Shapiro Group.

(Additional reporting by Jui Chakravorty Das in New York; Kevin Krolicki and David Bailey in Detroit; David Alexander and Thomas Ferraro in Washington; Estelle Shirbon in Paris; Editing by Lincoln Feast and David Holmes)

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