Moody's Investors Service cut its rating of

General Motors'

(GM) - Get Report

long-term debt to Baa3 Tuesday, citing the automaker's March 16 profit warning.

The ratings action is mixed news for GM, which some feared was bound for junk status when Moody's began its review last month. GM's long-term debt is now poised one notch above junk at the three main ratings houses, which also include Standard & Poor's and Fitch.

GM shares were recently up 13 cents to $29.18.

"The downgrade of GM's ratings reflects Moody's expectation that formidable long-term challenges in the company's automotive operations -- an uncompetitive fixed-cost structure including burdensome health care costs, steadily declining market share and an increasingly competitive pricing environment -- will extend the time frame over which a recovery will occur and will also moderate the strength of any eventual rebound in earnings and cash flow," Moody's said.

The agency, which also cut General Motors Acceptance Corp. to Baa2, said the action concludes a review begun when GM cut its 2005 earnings outlook by more than half and said it would unexpectedly lose money in the first quarter. The company has since floated various plans to shore up its credit, including several asset sales.

"If the prospects for such improvement become less probable, the ability to sustain the investment-grade rating will further diminish," Moody's said. Within the next six months the rating agency will assess the progress GM is making in laying the groundwork for adequate improvement in its credit metrics."

Another downgrade by S&P or Moody's would have bearish implication for the bond market, since GM and its subsidiaries have more than $200 billion of debt outstanding and make up more than 2% of the benchmark Lehman investment-grade bond index. A cut to junk status would make GM debt off-limits to a huge category of bond fund managers who are prohibited from owning below-investment-grade debt.