The Chapter 11 bankruptcy filing came after a $465 million rescue deal with Chinese auto parts supplier Wanxiang Group unraveled.

A123, which has tapped half of its government grant, agreed to sell its automotive operations, including two factories in Michigan, for $125 million to Milwaukee-based Johnson Controls Inc, a leading battery supplier and another recipient of federal green subsidies.

The bankruptcy illustrates the sharp reversal of A123's fortunes since 2009, when its stock rose 50 percent on the first day of trading on the Nasdaq. But weaker-than-expected demand for hybrids and missteps, including a costly battery recall, hit A123's bottom line and left the start-up with excess capacity.

The bankruptcy filing, on the day of the second of three debates between President Barack Obama and Romney, gave Republicans fresh ammunition ahead of the November 6 election to attack Obama's subsidies for green energy.

The U.S. Department of Energy allotted about $90 billion for various clean-energy programs through the administration's stimulus package. Of that, at least $813 million went to energy companies that eventually filed for bankruptcy, including the grant to A123 and a loan to solar panel maker Solyndra.

Romney campaign spokeswoman Andrea Saul cited the A123 bankruptcy as proof of Obama "gambling away billions of taxpayer dollars on a strategy of government-led growth that simply does not work."

Obama campaign spokesman Adam Fletcher countered that the investments helped to more than double renewable energy production from wind and solar, "creating good-paying jobs and bringing manufacturing back to our shores."

Romney argues that the government should not pick corporate winners and losers, while Obama has countered that such investments are needed to bolster the U.S. position in advanced batteries and other cutting-edge green technology.

"The riskiest strategy of all is not competing aggressively for the technologies of tomorrow and the jobs that come," Dan Leistikow, DOE director of public affairs, said in a blog post. "In an emerging industry, it's very common to see some firms consolidate with others as the industry grows and matures."

FILING COMES AFTER 8-MONTH SEARCH

A123 has come under pressure over the last year after Fisker Automotive cut battery orders for its Karma plug-in hybrid in October 2011. This year, A123 had to recall battery packs made for Fisker, which made up 26 percent of A123's revenue in 2011.

The bankruptcy filing comes after roughly eight months of attempts by A123 to find a buyer or strategic investor, Chief Financial Officer David Brystash said in a court filing. In March, A123 hired Lazard Freres & Co, which contacted 74 potential partners and investors.

Twenty-four discussed the process with Lazard, but only Wanxiang offered to invest in A123 as a going concern. In August, A123 announced the $465 million rescue deal with Wanxiang, which immediately gave A123 a $22.5 million loan, including a cash advance of $12.5 million.

Future cash infusions from Wanxiang were contingent on A123 meeting certain requirements, included getting approval from the Committee of Foreign Investment and the Chinese government as well as the absence of any default. Shortly before filing for bankruptcy, it became apparent that A123 would fall short of some of those conditions, according to court documents.

Johnson Controls has provided $72.5 million in debtor-in-possession financing to A123. Johnson Controls said its interest "is consistent with (Johnson Controls') long-term commitment to being a market leader in the advanced battery industry."

Fisker said it welcomed A123's deal with Johnson Controls, adding that the automaker had enough batteries for Karma through the first quarter of 2013. A123 also supplies batteries for the Chevrolet Spark EV that will be introduced next year by General Motors Co. GM said it expects no delays in the program.

In a research note, Morgan Stanley analyst Ravi Shanker said Johnson Controls would be able to wring out costs in A123 and possibly bring the company to break-even quickly.

Johnson Controls supplies batteries to Ford Motor Co, BMW and Daimler, among others.

A123 expects to sell its non-automotive operations and has identified certain bidders, according to the filing. A123 listed total assets of $459.8 million and liabilities of $376 million in its Chapter 11 petition.

WINNERS AND LOSERS

A123 had promised to create 38,000 U.S. jobs, including 5,900 at its own plants, in return for the government funding under the 2009 American Recovery and Reinvestment Act's Electric Drive Vehicle Battery and Component Manufacturing Initiative.

Johnson Controls, which supplies lithium-ion batteries to a number of vehicle manufacturers, also received a $299 million grant under the same program. A123 has tapped $132 million, or about half, of its U.S. grant, the DOE said.

"The disposition of the remaining grant funds will be decided later as we continue to work with the new owners as they determine their plans for the future," DOE spokewoman Jen Stutsman said in an email to Reuters.

The highest-profile recipient of federal funds, Solyndra, will square off in court Wednesday against the Internal Revenue Service and the DOE as it argues for its bankruptcy plan.

That plan provides $300 million-plus in tax breaks for Solyndra's venture capital backers while potentially leaving the government with zero return on its investment. Every class of creditor has approved the deal except the government.

The case is In re:A123 Systems Inc, U.S. Bankruptcy Court, District of Delaware, No:12-12859.

(Additional reporting by Roberta Rampton, Patrick Rucker and Steve Holland in Washington, Tom Hals in Wilmington, Tanya Agrawal and A. Ananthalakshmi in Bangalore; Editing by Don Sebastian, Dan Grebler and David Gregorio)

• A Permanent Economic Emergency