Committee members grilled Paulson on the administration's stance that the $25 billion must come from separate legislation passed by Congress in September. The measure was designed specifically to help auto manufacturers retool their factories so they can make more fuel-efficient vehicles.
The $700 billion bailout plan enacted by Congress in October and signed into law by President George W. Bush did not envision that the program would be used to help rescue nonfinancial companies, Paulson said. "I believe the auto companies fall outside of that purpose."
At the same time, he testified, "I think it would be not a good thing, it would be something to be avoided, having one of the auto companies fail, particularly during this period of time."
Paulson said that solving the financial problems of the automakers should be done in a way "that leads to long-term sustainable viability" for the industry.
Auto executives, backed by leading Democrats, insist they need another $25 billion in emergency bridge loans - on top of the $25 billion already approved and being administered by the Energy Department - to avert a collapse of one or more of their companies. That would bring the total federal help for the industry to $50 billion this year.
The executives, along with the head of the United Auto Workers union, were making their case at a hearing before the Senate Banking Committee as auto bailout backers hunted the votes necessary to pass the plan in a postelection session. Aides in both parties and lobbyists tracking the plan privately acknowledge they are far short.
Karen Majewski, mayor of Hamtramck, Mich., said police, fire and public works departments would face major cuts if they lost tax factories from GM and American Axle plants in her city. "We're talking about the lifeblood of our city," she said.
She was among local officials from cities with auto plants making the rounds on Capitol Hill on Tuesday, lobbying for the $25 billion in auto-industry bridge loans.
The debate comes as the financial situation for General Motors Corp., Ford Motor Co. and Chrysler LLC grows more precarious.
General Motors, Chrysler and Tesla Motors Inc. have already applied for loans under the existing $25 billion Energy Department program and Ford CEO Alan Mulally said the automaker plans to apply on Tuesday. GM, Chrysler and Ford have not disclosed the amount of aid they're seeking or for what purposes. Tesla said it was seeking about $400 million in loans for two projects.
Cash-strapped GM said it will delay reimbursing its dealers for rebates and other sales incentives and that it could run out of cash by year's end without government aid.
Mulally argued Tuesday in advance of the hearing that his company already been laboring to "transform our business" into a more profitable one that meets 21st century demands for fuel-efficient vehicles.
Interviewed on ABC's "Good Morning America," Mulally denied that automakers resisted restructuring their companies or that it has been badly managed.
Sen. Carl M. Levin, D-Mich., an architect of the auto bailout, said that auto executives need to address the perception by some lawmakers "that there's still some quality issues with the Big Three, and they haven't begun to do the necessary restructuring - because they have."
Levin's bill would provide loans with initial interest rates of 5 percent to the U.S. automakers and suppliers in exchange for a federal stake in the companies or warrants that would let the government profit from future gains. Loan applicants would have to give the government a plan for "long-term financial viability."
But it stops short of giving the government a say over the firms' operations through an oversight board or hard limits on executive compensation. While taking advantage of the program, the companies could not pay dividends, award bonuses to executives making more than $250,000 a year, or give golden parachute payments to top people departing from the firms.
A vote on the measure - which includes an extension of jobless benefits - could come as early as Thursday. But Majority Leader Harry Reid, D-Nev., also laid the groundwork for a straight up-or-down vote on the more widely supported unemployment measure, which is probably all that can pass this week.