By Emily Chasan and Phil Wahba

The iconic U.S. automaker was in the third and final day of its sale hearing in U.S. bankruptcy court in Manhattan, asking Judge Robert Gerber for approval to sell its best assets to a "New GM" funded by the U.S. government.

A group of dissenting bondholders, however, called the sale the first attempt at "Chapter 11 nationalization" and said it should be blocked because the government was trying to circumvent the law.

But GM's lead bankruptcy attorney, Harvey Miller of law firm Weil Gotshal & Manges, told Judge Gerber that anything but approval of the sale would have "catastrophic" and "irreversible" consequences for GM and the auto industry.

"The objectors are asking your honor to play Russian roulette," Miller told Judge Gerber, in response to claims from the bondholder group that GM could pursue a more traditional Chapter 11 reorganization plan rather than a fast track sale.

"These are assets that will deteriorate in value, and that deterioration will be felt by all stakeholders," Miller said, noting that June auto sales this week showed GM was losing market share to Ford Motor Co <F.N>.

This week GM's Chief Executive Officer Fritz Henderson, and Harry Wilson, a senior member of the Obama administration's autos task force, told the court the sale is GM's only option for survival. Henderson said he does not expect GM to make money in 2009.

If the deal were approved, New GM plans to operate the best parts of the old company, like Chevrolet and Cadillac, with a less-expensive workforce, smaller dealer network, and much less debt. The "old GM," which would include unpopular brands and unneeded factories and liabilities, would be liquidated in bankruptcy court.

BONDHOLDER GROUP RESISTS

Earlier in the court hearing on Thursday, Michael Richman, a Patton Boggs attorney representing a group that calls itself the "Unofficial Committee of Family and Dissident GM Bondholders," argued that the proposed deal had not been negotiated as a legitimate sale to an independent party.

Instead, he said the government determined what would be needed to make a "settlement offer" to "favored parties" like the United Auto Workers union, and then it decided on the price of the sale on the back end of the negotiations.

Richman said "it's not credible" that the U.S. government would turn on GM after providing the company with billions of dollars in support. He asked the judge to "call the bluff" that the government would walk away from the automaker if a deal were not closed by July 10.

GM, however, has said the holders of more than 50 percent of the company's bonds support the sale and a lawyer for Wilmington Trust, the indentured trustee for much of GM's bonds, said his client was not willing to "take the risk" involved with a reorganization plan, which could further reduce bondholders' recovery.

Under the terms of the deal, the U.S. Treasury would provide $60 billion in financing to the new company, including a proposed $50 billion that would give the U.S. Treasury a 60 percent stake in the company.

The UAW would gain a 17.5 percent stake, the Canadian government would own about 12 percent, and GM bondholders would be expected to obtain about 10 percent of the new company.

GM is asking Judge Gerber to approve the sale just one month after the filing for Chapter 11 bankruptcy protection, as no other bidders have come forward to offer an alternative.

A successful sale of GM's main assets would be the second big victory for the Obama administration's auto task force. It helped broker the sale of Chrysler LLC to a group led by Italy's Fiat SpA <FIA.MI> last month.

GM's official unsecured creditors' committee said in court that it was withdrawing its limited objection to the sale due to new agreements over GM's wind-down budget and a deal for "New GM" to take on Michigan workers' compensation claims from Old GM.

The case is In re: General Motors Corp, U.S. Bankruptcy Court, Southern District of New York, No. 09-50026.

(Reporting by Emily Chasan and Phil Wahba, editing by Matthew Lewis and Gerald E. McCormick)