The U.S. auto industry may offer one of the best illustrations of the devastating effects of the global financial crisis.

When the storm is over, it’s likely the Big Three U.S. auto makers will be down to two.

In an effort to stave off further deterioration in the operations, General Motors (GM), the biggest U.S. car maker, and number three Chrysler are negotiating a possible merger, according to The Wall Street Journal. Ford Motor (F) is the other member of the Big Three.

Chrysler’s majority owner, Cerberus Capital Management, is also reportedly talking to the combined international auto maker Nissan Motor (NSANY) and Renault. Daimler (DAI) still owns a stake of less than 20% in Chrysler.

Michelle Krebs, an auto industry analyst with Edmunds.com, wrote recently that Chrysler could find a partner as early as Nov. 4.

If the marriage with GM happens, it will be two decidedly smaller companies that join forces.

Chrysler said Friday it will cut 25% of its salaried workers, or about 4,300 employees, beginning next month.

That’s on top of 1,825 jobs cuts the car maker announced a day earlier, layoffs that will result from closing a sports utility vehicle plant in Newark, Del., and eliminating a shift at a Toledo, Ohio, Jeep plant.

Chrysler is also cutting a quarter of its contract workers, or employees who work for other companies under contract to Chrysler.

And more “restructuring” moves are on the way, according to the company, which has seen sales decline by 25% through the first nine months of 2008, the worst falloff of any of the big three U.S. car makers.

“These are truly unimaginable times for our industry,” said Chrysler Chief Executive Robert Nardelli said in a statement.

That about says it all.

GM Chief Executive Rick Wagoner, in a recent letter to employees, was more specific. “The global credit crisis has had a dramatic impact upon the industry,” he said.

GM’s cost cutting measures announced this year include laying off salaried and contract workers, and scaling back on benefits such as 401(k) matching payments.

Meanwhile, foreign car makers such as Daimler, the German company that makes Mercedes Benz, Italian car maker Fiat, Renault in France, and South Korea’s Hyundai are all struggling, as well.

The likely global recession that is expected to significantly reign in consumer spending has combined with a tightening of credit markets to severely limit consumers’ ability to buy cars.

In the U.S., cars are piling up in dealers’ showrooms because bank loans for cars have all but dried up except for those with the best credit histories.

The numbers bear that out: about 964,000 vehicles were sold in September, down from 1.31 million during the same period a year ago, according to the research firm Autodata. Analysts have predicted 2008 U.S. sales will hit about 14 million, the lowest number by far in over a decade.

Add to this a widespread move away from large SUVs and pickup trucks, long a staple of American car makers, toward the smaller more fuel efficient models Asian car makers have specialized in for decades, and the picture is indeed very dim.

Separately, GM on Friday said it would delay the unveiling of a new Buick LaCrosse model and a coupe version of the Cadillac CTS, which it had planned to show at the Los Angeles auto show in November, in part to reduce costs. GM said it plans to unveil the LaCrosse at the Detroit Auto Show instead, according to reports.