US$13.4 billion will be made available in December and January from the US$700 billion fund that was originally designed to rescue struggling financial institutions, but the loans would be called back if the carmakers cannot prove they are viable by March 31, a US government official said.
The White House, in Washington, made the announcement of the unprecedented action.
The President took the action after Congress last week rejected legislation to provide US$14-billion in loans, a move which would have required more federal aid next year.
Reports from the US say Bush Administration officials had repeatedly said this week that under normal circumstances they would want companies to reorganise under bankruptcy provisions, but that these were not normal times.
GM and Chrysler have repeatedly warned that they could run out of cash within a few weeks as vehicles sales in the US have dropped to levels not seen since the early 1980s.
Ford Motor Company said it does not face a similar crisis but wants access to a federal line of credit in case market conditions worsen or one of its rivals fails.
The Chief Executive Officers of the three Detroit-based carmakers told Congress in hearings December 4 and 5 that they need at least $34 billion from the federal government to weather the economic downturn.
In a statement GM said, "We appreciate the President extending a financial bridge at this most critical time for the US auto industry and our nation's economy. This action helps to 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.
This will allow us to accelerate the completion of our aggressive restructuring plan for long-term, sustainable success. It will lead to a leaner, stronger General Motors.
Ford also welcomed the move.
"As we told Congress, Ford is in a different position. We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government,” Ford President and CEO Alan Mulally said.
“But all of us at Ford appreciate the prudent step the Administration has taken to address the near-term liquidity issues of GM and Chrysler. The US auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardise millions of jobs and further damage the already weakened US economy.”
Chrysler LLC Chairman and CEO Bob Nardelli said on behalf of the men and women of Chrysler and its extended enterprise, that he would like to thank the Administration and Treasury for their confidence in the Company.