Thousands of supplier jobs are at risk said parent firm Gaz
The government has told ailing van maker LDV that the taxpayer cannot be expected to bail out the firm, after it asked for £30m in loans.
The firm has asked the government for a bridging loan because it is "literally running out of cash".
LDV admitted that it has made a loss for four years. Sales have fallen after it suspended production in December.
Russian parent firm Gaz said without funding thousands of jobs were at risk, including 900 in Birmingham.
"The British taxpayer cannot be expected to pay for the company's losses," said a spokesman for Gordon Brown.
The spokesperson confirmed that talks with the firm were "ongoing and regular" and being conducted by Business Minister Ian Pearson.
Erik Eberhardson, who is the outgoing Gaz chairman and hopes to lead a management buy-out of the firm, says the situation is critical.
"Unfortunately since the company [LDV] is not producing, it is not making enough revenue to cover its costs and the company is literally running out of cash right as we speak," he said.
UK CAR INDUSTRY CUTS
1: Aston Martin (Gaydon) 600 jobs lost, three-day week
2: Bentley (Crewe) 220 jobs lost, seven-week closure from March
3: Ford (Essex, Daventry, Merseyside, Bridgend & Southampton) 850 jobs lost, four-day weeks, non-production days
4: GM Vauxhall (Ellesmere Port & Luton) 47,000 global job losses, four-day week
5: Honda (Swindon) Production halted until June
6: Jaguar Land Rover (Solihull & Halewood) 1,050 jobs lost plus production cuts
7: BMW Mini (Swindon & Cowley) 850 jobs lost, week-long stoppages planned
8: Nissan (Sunderland) 1,200 jobs lost, some shifts stopped
9: Rolls-Royce (West Sussex) 40 jobs lost plus non-production days
10: Toyota (Burnaston & Deeside) Some night shifts stopped, non-production weeks planned
11: LDV (Birmingham) 95 jobs lost, production suspended since December
Source: SMMT & BBC
"It's 850 jobs in the plant, 1,200 jobs in the dealer network and about 4,000 jobs in the supplier industry which are at risk".
He added: "We need £20-30m, depending on how we structure it," he added.
The joint leader of the Unite union, Tony Woodley, said the auto industry was on the brink.
"We've had a crisis that now could turn into a catastrophe," he said.
"That's why the government has got to do an awful lot more than it's even been trying to do."
Staff at LDV, which has already sent a number of workers home in recent weeks, said the picture at the firm was bleak.
John McLoughlin, said he had lost his job after working for the company for 33 years.
"I don't know where to go from here," he said.
"Luckily enough for me, today the wife has started a new job, so we've got some money coming in. It's not enough to pay the mortgage though."
His comments came as it was announced that staff at Jaguar Land Rover are to be balloted over whether to accept a pay freeze and four-day week in order to avoid compulsory redundancies.
Gaz is controlled by oligarch Oleg Deripaska, a friend of Business Secretary Lord Mandelson.
BBC business correspondent Martin Shankleman said the request for state help could cause Lord Mandelson political difficulties, after he was entertained by Mr Deripaska on his yacht over the summer.
But the shadow chancellor, George Osborne, said the government should not intervene to bail-out the van-maker.
Instead, ministers should establish a national loan guarantee scheme to help firms facing such difficulties, Mr Osbourne said.
Whitehall sources have told the BBC that any talks with the van firm would be conducted by junior ministers and officials at the Department for Business, Enterprise and Regulatory Reform.
But it is understood that ultimate responsibility over any scheme would still rest with Lord Mandelson.
Prime Minister Gordon Brown said the government had adopted measures to help firms, whatever their size.
He said steps included giving loans to small businesses, providing medium firms with working capital and larger firms with a facility from the Bank of England.
The government has already announced measures to support the car industry including guarantees to unlock loans of up to £1.3bn from the European Investment Bank, as well as a further £1bn in UK government loans, to fund investment in greener vehicles.
'Sign of faith'
Part of state-owned British Leyland (pictured) in the 1970s
Bought by Dutch firm DAF in 1987
Became independent firm LDV in 1993 after a management buy-out
2005 - bought by private equity group Sun Capital
2006 - purchased by Russian company GAZ
The management buy-out of the firm aims to make it into the first big producer of electric vans in the UK.
"We are almost ready to go, but we need the government to do its bit," added Mr Eberhardson.
"I am confident they understand the potential to secure this exciting green technology in Britain - and the need to move very quickly."
A company spokesman added: "Short-term bridging support for this management buy-out from the government will secure its future and the future of hundreds of jobs."
Liam Byrne, Labour MP for Birmingham Hodge Hill, said: "LDV's plans for a management buy-out are an excellent sign of faith by the... leaders in the company.
"For some weeks now I have been working closely with the company as they have shaped their ambitious plans for winning a big share of the 'green van' market."
LDV was bought by the Gaz group two years ago.
In November it announced 95 jobs were to be axed at its Washwood Heath factory in Birmingham.