Chrysler LLC's lenders are in talks with the U.S. government to reduce the automaker's debt by swapping some of it out for equity, new debt or a lesser amount in cash, sources familiar with the talks said on Friday.

The lenders for the $7 billion secured loan, which include JPMorgan Chase & Co , Citigroup Goldman Sachs Group Inc and Morgan Stanley , are open to working out a deal, the sources said. The discussions are moving quickly, with several different offers from the government on the table, they said.

The people declined to be identified because the talks are confidential.

One of the sources said the government was asking for a significant reduction in debt and that there was no single offer on the table at this point. They are evaluating a bunch of proposals. It could be cut by $6 billion, or it could be cut by a lot less, the person said.

A separate source close to the talks also said the government had suggested a reduction of as much as $6 billion in Chrysler's debt.

All four banks declined comment, as did Cerberus Capital Management , which controls 80.1 percent of Chrysler.

Chrysler said it is committed to working closely with all constituents, the administration, U.S. Treasury and the task force over the next 30 days to reach a successful conclusion.

Chrysler has been surviving on a $4 billion emergency loan from the U.S. government. On Monday it was given 30 days by the Obama administration to complete an alliance with Italy's Fiat SpA or face a cut-off of its government funding that could force its liquidation.

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

Chrysler's alliance talks with Fiat hinge on the terms for additional federal aid, one of the sources said. The alliance talks are effectively on hold until the government reaches a deal with the lenders, adding a sense of urgency to the discussions, the person said.

GOVERNMENT INFLUENCE

The lending banks are holders of first-lien secured debt, meaning they are first in line to be paid if the company files for bankruptcy. Chrysler's assets were pledged as collateral for the loans.

However, the willingness of the banks to get a deal done shows the government's influence on the banks, who themselves have received federal aid.

The four banks and Bear Stearns underwrote a $7 billion term loan that provided working capital for the automaker in a deal that was agreed in the summer of 2007.

That bank debt is worth far less than $7 billion on the open market. The average bid for Chrysler's automotive operations bank loan is around 15.2 cents on the dollar.

Portions of that senior secured debt were sold to roughly 50 other institutions, a source familiar with the credit group said, reducing the exposure of the original lenders.

JPMorgan's purchase of Bear Stearns meant its exposure increased to $2.5 billion, but it is unclear how much of that has been hedged or at what value it is being held on the bank's books. Citi has under $1 billion, one of the sources said.

Goldman Sachs sold some of its loans last year, sources previously told Reuters Loan Pricing Corp.

Cerberus, along with a consortium of co-investors, bought its 80.1 percent stake in Chrysler and the auto company's financing arm Chrysler Financial in May 2007 for $7.4 billion.

Cerberus has long been prepared for a loss on the equity side. It said last year it would agree to forgo any profits that could be earned relative to Chrysler as a result of any financing the government may choose to provide.

If Cerberus' debt is swapped for equity, Cerberus could end up with a small equity position in the new car company, a source familiar with the situation said, although that would be determined by the government.

The U.S. Treasury was not immediately available for comment.

(Reporting by Jui Chakravorty and Megan Davies; Editing by Tim Dobbyn, Gary Hill)

Investment Goldman sachs Chrysler