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By Jane Barrett
MILAN, May 16 (Reuters) - Moody's said on Friday it might cut its rating on Fiat's debt again just five months after slapping a "junk" tag on the sputtering Italian carmaker and said there were still substantial challenges ahead.
The credit ratings agency said the latest review was sparked by a still poor performance at core car unit Fiat Auto, weaker results at truck maker Iveco and tractor unit Case New Holland and hurdles Fiat will face in the medium term.
Moody's cut its rating on Fiat's long-term debt to Ba1, its highest non-investment grade, in December. Fellow agencies Standard & Poor's and Fitch have also cut Fiat to "junk" status.
The threat of another downgrade, which could raise the cost of any new borrowing, hit Fiat's stock which closed 2.4 percent lower at 6.82 euros. Fiat's bonds fell slightly in value after rallying in recent weeks.
"Obviously we are a bit disappointed but we have no view (on Moody's decision)," a Fiat spokesman said.
After juddering through its worst ever year in 2002, Fiat made a worse-than-expected operating loss of 342 million euros in the first quarter and burned through 1.4 billion euros of cash -- a perennial problem at the Turin-based group.
Last year Fiat Auto -- 20-percent owned by General Motors -- posted negative cash flow of 1.78 billion euros. New Fiat CEO Giuseppe Morchio has said the group is working to improve cash flow in a new turnaround plan due in June.
Moody's said its decision would hinge predominantly on the plan, its potential effect on earnings, cash flow and flexibility and the ability to balance cash burn at Fiat Auto with cost-savings and better cash flow at other units.
Morchio said on Tuesday that each individual unit in Fiat's publishing-to-components empire was working to improve cash flow but the 104-year-old group will only be able to count on its two best money spinners for another few months.
Cash-generative insurer Toro and aviation unit Fiat Avio are being sold as the last stage of a disposal plan to cut debt, expected to raise about four billion euros.
Moody's said it would look at how the asset sales would affect Fiat's liquidity, which weakened in 2002, as well as risks related to the execution of the asset sales.
Morchio has said costs will be a key pillar of his restructuring plan, including saving money by increasing joint ventures with GM -- also key to the U.S. giant's loss-making European operations.
Fiat and GM are currently working on a deal to develop a common platform for the mid-size "C" segment which includes the Fiat Stilo and GM's Opel/Vauxhall Astra. Top managers met in New York on Thursday but made no comment after the meeting.