Delphi is the largest US firm to file for bankruptcy protection

The company told Judge Robert Drain it had little choice but to take such drastic action or collapse.

"Simply stated, Delphi must become competitive to survive," Delphi lawyer Jack Butler told the Bankruptcy Court for the Southern District of New York.

Unions argue that if the contracts are made void Delphi will have free rein to force through deep wage cuts.

The United Auto Workers (UAW) union added that cancelling Delphi's agreement would give the company an unfair advantage in being able to push through its proposed changes, which would also deprive workers of long-promised benefits.

"Delphi must be empowered to change the status quo," Mr Butler told the court.

"There is no magic balm that makes competition go away."

Falling market share

Delphi has blamed the falling market share of General Motors (GM) in North America, as well as rising commodity prices and huge wage and benefit costs inherited from GM for its woes.

Under the plans to restructure the business, Delphi aims to cut 23,000 jobs, close 25 plants and to cut benefits for staff, and wages from $27 (�14.50) per hour to $16.50 (�8.80) an hour.

However, the plan requires a large contribution from its largest customer and former owner, GM. Without the contribution Delphi will only pay $12.50 (�6.70) an hour.

It also hopes to cut benefits for retired staff.

Strike threat

The UAW has vowed to launch strike action if Delphi does cancel its contracts.

Strike action could cripple production at GM, costing it millions of dollars, but the company has said it has stockpiled enough supplies to ensure seven days of production.

The current hearing is expected to last for several days, while a ruling could take months.

Delphi is also set to launch a separate motion at a hearing set for June, which will urge the courts to reject its unprofitable agreements with GM.

As the current hearing began, GM chief Rick Wagoner said resolving its problems with Delphi was a key priority for the carmaker.

While admitting that the situation at the car parts firm was a key drag on GM shares and forecasts, he added that ending the disagreement was GM's "next order of business".