DETROIT — Talks between Chrysler LLC's lenders and the Treasury Department to reduce the automaker's $6.9 billion in secured debt and keep it out of bankruptcy protection have disintegrated, a person familiar with the talks said early today.

Chrysler's fate was in the hands of about 40 hedge funds that hold about 30 percent of its debt. Although four banks holding 70 percent of the debt had agreed to erase it for $2 billion, the hedge funds were holding out for a better deal.

To entice the hedge funds into going along with the banks, the government yesterday afternoon added $250 million to the $2 billion that the banks had settled for and gave the hedge funds a 6 p.m. deadline to work it out, two people briefed on the talks said.

All of the people spoke on condition of anonymity because the negotiations were private.

Michigan Gov. Jennifer Granholm, speaking at a news conference about the swine flu, had urged them to consider Chrysler's 54,000 employees.

"On behalf of Michigan, on behalf of the thousands of people who will be affected if this company is forced into bankruptcy, I am publicly asking these hedge funds to not be greedy but to do what the banks have done and what everyone else around the table has done — take the concessions," she said.

But several of the funds came back with their own different counterproposals, leaving the Treasury Department to bargain with 46 funds, the person said. Treasury extended the deadline into the evening, but when it appeared there was no central authority to negotiate with, decided to end talks around midnight.

"This is the one shot when everybody had a chance to say yes or no," the person said. "You had 46 different people here, and they said no."

The collapse of the talks means Chrysler will almost certainly head for Chapter 11 bankruptcy protection, unless a deal can be salvaged by the government's deadline of 11:59 p.m. today. Others briefed on the negotiations said Chrysler needs to get 100 percent of its creditors to sign on.