The federal government will help Detroit's ailing automakers survive at least another few months by offering $17.4 billion in rescue loans in exchange for concessions from carmakers and their workers.
The government will have the option of becoming a stockholder in the companies, much as it has with major banks, in effect partially nationalizing the industry.
At the same time, Treasury Secretary Henry Paulson said Congress should release the last half of the $700 billion from the Wall Street rescue fund that it approved in October to bail out huge financial institutions.
Tapping the fund for the auto industry essentially exhausts the first $350 billion of the fund, he said.
President Bush said Friday that a bankruptcy was unlikely to work for the auto industry at this time because it would deal "an unacceptably painful blow to hardworking Americans" across the economy.
Automakers will get $13.4 billion of the money this month and the next, $9.4 billion for General Motors Corp. and $4 billion for Chrysler LLC. An additional $4 billion will be made available to the companies later. Ford Motor Co. has said it does not need immediate help.
Bush said the loans will be called back if the companies are not viable by March 31.
"The time to make hard decisions to become viable is now, or the only option will be bankruptcy," Bush said. "The automakers and unions must understand what is at stake and make hard decisions necessary to reform."
Bush's plan is designed to keep the auto industry running in the short term, passing the longer-range problem on to the incoming administration of President-elect Barack Obama.
Obama hailed Bush's decision as "a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers."
Obama called on the auto companies to bring all their stakeholders together, including labor, dealers, creditors and suppliers, to make the hard choices necessary to achieve long-term viability.
"The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry and the millions of American jobs that depend on it," he said in a statement.
The White House package is the lifeline desperately sought by U.S. automakers, who warned they were running out of money as the economy fell deeper into recession, car loans became scarce and consumers stopped shopping for cars.
The carmakers have announced extended holiday shutdowns. Chrysler is closing all 30 of its North American manufacturing plans for four weeks because of slumping sales; Ford will shut 10 North American assembly plants for an extra week in January, and General Motors will temporarily close 20 factories -- many for the entire month of January -- to cut vehicle production.
Bush said the auto manufacturers have faced serious challenges for many years: burdensome costs, a shrinking share of the market and plunging profits.
"In recent months, the global financial crisis has made these challenges even more severe," he said.
The president said that on the one hand, the government has a responsibility not to undermine the private enterprise system, yet on the other hand, it must safeguard the broader health and stability of the U.S. economy.
"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers," he said.
"Under ordinary economic circumstances, I would say this is the price that failed companies must pay," the president said. "And I would not favor intervening to prevent the automakers from going out of business. But these are not ordinary circumstances.
"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."
General Motors and Chrysler thanked the administration for its help Friday morning.
In a statement, Chrysler CEO Bob Nardelli said the initial rejection of capital will help the company get through its cash crisis and help eventually return to profitability. He said Chrysler was committed to meeting the conditions set by Bush in exchange for the money.
General Motors said in a statement that Bush's decision will help "preserve many jobs, and supports the continued operation of GM and the many suppliers, dealers and small businesses across the country that depend on us."
GM added that the loan will allow the company to accelerate the completion of its restructuring plan and lead to a "leaner, stronger General Motors."
Not everyone was pleased with the auto rescue plan. Sen. John McCain was among several Republican lawmakers who decried Bush's decision.
"I regret the president's decision to give away over $17 billion to the domestic automakers. I find it unacceptable that we would leave the American taxpayer with a tab of tens of billions of dollars while failing to receive any serious concessions from the industry," McCain said in a statement.
"It is deeply disappointing that the administration has chosen to use taxpayer dollars to delay the inevitable need to fundamentally restructure these companies," U.S. Rep. Tom Price, R-GA, said in a statement.
"By bailing out automakers without real reform or long-term solutions, we are only protracting uncertainty and putting billions of tax dollars at grave risk."
Price said the it is now clear that the creation of the $700 billion rescue fund was a mistake because it has placed a crushing burden of debt on the country while failing to stabilize the financial markets.
"Americans are sick and tired of working hard only to have their tax dollars sent to prop up failing enterprises," he said, suggesting the Chapter 11 bankruptcy would have been a better solution. "As it has always been, the best solution for any troubled company is to enter the tried and true reorganization process already afforded by law."
The Associated Press and FOX Business Network's Peter Barnes contributed to this report.