Enron, the giant US energy company, filed for Chapter 11 bankruptcy yesterday and hit rival and one-time suitor Dynegy with a $10 billion (€11 billion) breach of contract lawsuit for pulling out of a last-ditch merger effort.

The filing, in the federal bankruptcy court in the Southern District of New York, sought protection from creditors while Enron, burdened with at least $16 billion in debt, tries to reorganise its finances. Under Chapter 11 of the US bankruptcy code, a company can continue to operate while it and creditors work out a reorganisation plan.

The lawsuit accuses Dynegy of wrongfully terminating a $9 billion merger deal last Wednesday. The suit also seeks to stop Dynegy from exercising its option to obtain Enron's Northern Natural Gas Pipeline, the heart of Enron's pipeline system. The units which own Enron's pipelines were not part of the bankruptcy filing, the company said.

"While uncertainty during the past few weeks has severely impacted the market's confidence in Enron and its trading operations, we are taking the steps announced today to help preserve capital, stabilise our businesses, restore the confidence of our trading counter-parties, and enhance our ability to pay our creditors," Enron chairman and chief executive officer, Mr Ken Lay, said in a statement.

To help it recapitalise its North American trading business, Enron said it is in negotiations with banks to get credit support. Enron said it would provide traders and back-office support staff, and would trade through its EnronOnline internet platform. Nonetheless, the massive layoffs expected to accompany a bankruptcy filing will now become reality.

Enron said it would implement "substantial workforce reductions", primarily from among the 7,500 workers employed at its Houston headquarters. It gave no firm numbers, but the cuts are expected to be in the thousands. Enron will also continue its previously planned campaign to sell off non-core and underperforming assets.