Moody's Investors Service (search) on Tuesday cut General Motors Corp.'s (GM) debt rating to a step above junk status, citing the company's profit warning last month, and cautioned that it may cut ratings of rival Ford Motor Co. (F).

GM said last month that it will post its weakest first-quarter earnings since 1992, and profit this year could fall as much as 80 percent below its previous forecast. GM is also grappling with soaring healthcare costs and falling market share.

Investors are watching GM's and Ford's debt ratings very carefully. GM, theld's largest auto maker, is one of the biggest corporate bond issuers in the U.S. If GM's bonds are cut to junk, its borrowing costs may skyrocket.

Moody's said the outlook on GM's debt ratings is negative. The automaker now has the same rating and outlook from all three agencies, although Moody's still rates GM's finance subsidiary, General Motors Acceptance Corp. (search) at two steps above junk. GMAC issues most of GM's roughly $300 million of debt.

Moody's cut GM's debt ratings to Baa3 from Baa2, and cut GMAC's ratings to Baa2 from Baa1. The outlook for both entities is negative.

Spreads on GM and Ford bonds, the extra yields they pay over U.S. Treasuries, widened by about 0.15 to 0.25 percentage point, traders said.

The review of the Ford rating was prompted by Moody's concerns about the company's ability to achieve its 2006 profit target of $7 billion before taxes.

Ford faces many of the same problems as GM, including rising health-care costs and falling U.S. market share,

Moody's said it may also cut ratings of Ford's finance arm and Ford unit Hertz Corp (search). The combined downgrades would affect $175 billion of debt.

Moody's rates Ford's long-term debt "Baa1," three steps above junk, and its finance arm Ford Motor Credit one notch higher at "A3." Moody's rates Hertz Corp.'s long-term debt "Baa2," or two notches above junk, and its short-term debt "Prime-2." Ratings downgrades usually raise borrowing costs.

Moody's also affirmed Ford Credit's short-term rating at "Prime-2."

Ford spokesman Oscar Suris declined to comment on Moody's warning.

Ford, which said last month that it expects profits this year to be at the lower end of its previous forecast range of $1.75 to $1.95 a share, said in January that it was on track to meet its goal of posting a pretax profit of $7 billion next year.

The $7 billion target is a crucial milestone in the five- year turnaround plan Ford launched in January 2002, when the industrial icon was teetering on the brink of financial collapse.

Ford's 7.45 percent bonds due 2031 were quoted around 3.90 percentage points more than Treasuries, about 0.20 percentage point wider on the day, a trader said.