General Motors (NYSE: GM - News) ' shares fell more than 5 per cent on Wednesday after Moody's downgraded the carmaker, citing concerns over whether it could make and sell smaller cars fast enough to compensate for collapsing large-vehicle sales.

The ratings agency lowered GM's "corporate family" and "probability of default" ratings deeper into junk territory to Caa1 from B3, seven notches below investment grade.

Moody's said the downgrade reflected the challenges GM would face in re-establishing a competitive position and generating positive cashflow amid annual US vehicle sales that could remain below 15m units through 2009.

Rick Wagoner, GM's chief executive, told the Financial Times this week that the company had put the worst behind it in terms of US job cuts and restructuring, but also said July's annualised US car sales of 12.7m units was "not a long-term sustainable position."

GM, like rival carmakers Ford Motor and Chrysler, has responded to flagging demand for sport utility vehicles and pick-ups by reducing jobs and capacity at plants making them, and fast-tracking plans to produce smaller cars and crossover vehicles.

However, Moody's on Wednesday said GM would encounter difficulties in establishing pricing power in these segments, and raised questions over the 18 to 21-month timeframe it needed to expand its portfolio.

GM would face challenges "convincing consumers that these vehicles offer as good a value proposition [as] Asian product," Moody's vice-president Bruce Clark said.

Rival agency Standard and Poor's downgraded GM, Ford and Chrysler a notch to B- last month.

Credit default swaps on both GM and Ford have hit all-time highs of late. The cost of default protection on the two companies rose slightly after the latest downgrade. Current levels indicate a probability of 75-80 per cent that GM will default over the next five years, dealers said on Wednesday.

GM had liquidity worth $21bn in cash and about $5bn in committed credit facilities at the end of June.

It plans to raise more money through cost-cutting, new borrowing, and asset sales worth about $5bn by the end of 2009.

However, Moody's said that achieving its planned level of savings and new capital "may be challenging" for GM.

In another sign of the tightness of credit and pessimism surrounding US carmakers, Chrysler's lending arm was able to refinance just $24bn of a $30bn one-year credit facility that expired recently and paid higher interest rates.

Moody's left its ratings on GMAC, the GM finance company it co-owns with buy-out group Cerberus at B3.