ring amid a prolonged economic downturn and has been hit by the sub-prime mortgage crisis.

Ford and GM are in the thick of negotiations with the United Auto Workers union, the most powerful labour group in the industry. The car makers maintain they must dramatically reduce manufacturing costs if they are to survive in today's global economy.

Their biggest burden is the current labour cost per vehicle - an estimated $71 (around £35) per man hour. Workers earn about $27 an hour with the remainder made up of overheads such as pensions and healthcare costs for the thousands of retirees on their books.

Ford and GM have made it clear that they expect to reduce the hourly cost from $71 to about $50 - a cut of about 30 per cent. The companies are keen not to cut workers' hourly pay, but they insist that other overheads must be reduced.

If a deal cannot be reached, Ford and GM negotiators have said the companies will have no choice but to move their North American operations to countries in Latin America and Asia where manufacturing costs are cheaper.

The current credit crisis is not helping the ailing US car manufacturers to reverse their fortunes. Many senior figures in the industry are calling for action from the Federal Reserve to spur markets and the economy. Bob Nardelli, the new Chrysler CEO, has been most vocal in calling for an interest rate cut to help boost consumer activity.

Alan Mulally, the Ford chief executive, said last week that economic conditions were proving to be a 'big headwind' working against the company's turnaround plan. He stopped short of calling for an interest rate cut but stressed the importance of 'focusing on economic growth'.

A GM spokesman said: 'From a GM perspective, the focus of the talks is on closing the competitive gaps and building a viable long-term future for the company and our people.'

Sources close to senior GM executives confirmed that the prospect of shifting operations away from North America was very real. 'We have seen it in every other industry,' one said. 'There are no sacred cows today. Globalisation means just that, it's a worldwide playing field.'

Dave Cole, chairman of the Centre for Automotive Research, a leading car industry think tank in Detroit, said: 'This threat is very real and the UAW is aware of it. Both GM and Ford have made it clear to the union that you do whatever you have to do to stay in business.'

The car makers are also discussing ways in which they can work together with the UAW to offload billions of dollars of pension and healthcare costs they have amassed. It is understood the talks focus on creating a 'Voluntary Employee Beneficiary Association', which would be part-funded by the companies to take care of retiree health care costs. The talks must reach a conclusion before their current contract with the UAW expires on 14 September.