Delphi Corp, the largest auto parts supplier in the US, has filed for bankruptcy protection.
GM sales fell nearly 25% last month
The former General Motors-owned company is the biggest US car industry firm ever to seek Chapter 11 protection.
Delphi warned in August that it was in financial difficulties and that it was in talks about a "comprehensive restructuring" of its business.
Delphi has been hit by problems at GM, its main customer, triggered by falling sales of sports utility vehicles.
The firm, which employs 185,000 workers worldwide, has struggled since it was spun off from GM in 1999.
It posted losses of $741m (£421m) in the first half of 2005 alone.
Chapter 11 gives US companies time to rearrange their finances while still conducting business.
It also allows them to use the bankruptcy courts to enforce proposed changes to labour agreements.
Delphi - headed by business turnaround specialist Steve Miller - has said that it wants to reach a "consensual" agreement with unions over an overhaul of its US business.
However, it has warned that it is committed to turning the business round "one way or another".
Unions have claimed that Delphi wants to cut wages, trim healthcare benefits and slash holiday allowances.
According to the United Auto Workers (UAW) union, Delphi wants to reduce hourly US wages from their current $27 to $10 while being able to close and merge factories.
Mr Miller said the UAW's comments on proposed pay levels were "directionally correct" and added: "We are going to be taking a hard look at every line of business."
The UAW described the bankruptcy filing as "an extremely bitter pill", noting that it came one day after Delphi increased the severance packages for 21 top executives.
Delphi's survival is crucial to GM, since under the terms of its spin-off in 1999, the auto giant will have to meet some of the firm's pension costs if it fails to emerge from bankruptcy.
According to credit rating agency Standard & Poor's, Delphi's pension liabilities are worth $14.5bn.
S&P recently lowered Delphi's credit rating to "junk" status, claiming that its wage bill is far higher than its competitors.