updated 4/4/2008 1:38:42 PM ET 2008-04-04T17:38:42

A private equity group said Friday it has terminated its agreement to invest $2.55 billion in auto parts supplier Delphi Corp., which has been trying to emerge from bankruptcy protection.

The announcement by hedge fund Appaloosa Management LP could have major consequences for General Motors Corp., which owned Delphi until it was spun off in 1999. Delphi is still GM’s biggest parts supplier.

The Appaloosa-led investment was an essential pillar in Delphi’s reorganization, which has been complicated by a tight credit market. The loss of the deal puts Delphi’s plan to exit bankruptcy at risk and raises the issue of whether GM would be forced to offer even more support than it is already giving.

GM needs a steady supply of parts from Delphi and has a great incentive to help ensure Delphi’s ultimate survival.

Spokeswoman Renee Rashid-Merem said Friday that GM was disappointed that Appaloosa had withdrawn. “GM will continue to work with the involved parties to facilitate Delphi’s efforts to emerge from bankruptcy,” she said in a prepared statement.

Appaloosa’s announcement came as Delphi faced a Friday deadline to raise $6.1 billion in loans to help it out of bankruptcy.

Delphi said later in the day that it had raised the needed loan money and was ready to do the deal but that equity investors led by Appaloosa had refused.

“We are extremely disappointed that our plan investors have taken the position that they are not obligated to fund their planned investment commitments to Delphi and instead have chosen to walk away from the company and its stakeholders,” Delphi’s restructuring chief, John Sheehan, said in a statement. “We are prepared to pursue actions that are in the best interests of Delphi and its stakeholders.”

Appaloosa said Delphi has breached an agreement it had with the investor group but said it was still talking to Delphi and could potentially do a deal “in a capacity different than currently envisioned by the agreement.”

The letter from Appaloosa’s David Tepper, known for investing in distressed companies, said he had been “actively engaging in discussion to resolve our outstanding issues in a mutually acceptable manner.”

Appaloosa asserted Friday that it is now entitled to an $82.5 million fee, because Delphi breached their agreement by seeking an alternative transaction. It referred in its filing to Delphi’s effort to take more loans from GM, a move that threatened the power of the investor group.

Under the restructuring plan approved by the court and creditors, GM can offer up to $750 million in loans. A judge more recently ruled that a GM affiliate — but not GM itself — could offer two other loans, one of $2 billion and a second loan worth as much as $825 million.

Five of six investors in the Appaloosa group had objected to GM’s increased participation in the loans package over concerns about GM expanding its influence over Delphi. They had argued the loans would “adversely affect the company and the investors by materially increasing and concentrating GM’s ongoing influence and control.”

The other investors in the Appaloosa-led group are Harbinger Capital Partners Master Fund I Ltd., Merrill Lynch, Pierce, Fenner & Smith Inc., UBS Securities LLC, Pardus Capital Management LP and Goldman Sachs Group Inc.

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