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DETROIT — Talks between Chrysler LLC's lenders and the U.S Treasury Department to reduce the automaker's $6.9 billion in secured debt and keep it out of bankruptcy protection have disintegrated, a person familiar with the talks said early Thursday.

The company's fate was in the hands of about 40 hedge funds that hold about 30 per cent of its debt.

Although four banks holding 70 per cent of the debt had agreed to erase it for $2 billion, the hedge funds were holding out for a better deal.

After allowing talks to continue late into the night Wednesday, the Treasury Department finally ended negotiations after the hedge funds were unable to come to an agreement, the person said, asking not to be identified because the talks were private.

The deal's failure means Chrysler will seek bankruptcy protection unless something can be worked out before the government's 11:59 p.m. EDT deadline.

The company's Canadian division could follow.

Canadian Auto Workers president Ken Lewenza has said that Canada's plants would continue to operate if the parent company filed for bankruptcy.

Lewenza said Chrysler told him it planned to split into two parts if it filed for bankruptcy protection: one that will continue to operate with the help of an alliance with Fiat, and another that will liquidate its assets.

Financial aid from the Canadian and American governments to keep the company afloat had been contingent on the deals with the principals being reached.

The news of the breakdown in talks was a massive about-turn from just hours earlier.

U.S. President Barack Obama had said late Wednesday he was "very hopeful" that a deal could be worked out to keep Chrysler out of bankruptcy.

The company had been in talks with debtholders and Italian automaker Fiat Group SpA, which was set to become a major partner.

Obama said at an evening news conference he was more hopeful than he was a month ago that Chrysler would stay in business, but he declined to comment on details.

Obama's administration had sweetened its offer to the debtholders Wednesday, adding $250 million.

Debtholders had discussed counteroffers, said U.S. Representative Gary Peters (D-Mich.), whose district includes Chrysler's Auburn Hills headquarters.

"You've got high stakes negotiations going on right here at the very last hours," he said before talks had broken down.

"It's frustrating that these hedge funds continue to push for every last nickel," Peters said. "Tens of thousands of families' lives are at stake here."

Three people briefed on the talks said whether the debt issue will be settled either in or out of bankruptcy, the Fiat partnership would be signed by Thursday.

"Chrysler will survive and avoid liquidation. Whether that happens in or out of bankruptcy remains uncertain at this point," said one of the people.

All of the people spoke on condition of anonymity because the partnership agreement had not been announced. Obama may hold an event at the White House on Thursday should a deal be ready to announce.

Prime Minister Stephen Harper, federal Industry Minister Tony Clement and Ontario Premier Dalton McGuinty were due to make an announcement Thursday afternoon.

The topic was not specified but there was speculation it could be related to government help for the auto industry.

On Sunday, the Canadian Auto Workers ratified concessions to the automaker, and the United Auto Workers in the U.S. reached a tentative cost-cutting deal that members overwhelmingly ratified Wednesday night.