"Sometimes when you push the edge of technology, you fall over that edge," said Aaron Bragman, an automotive industry analyst at IHS Automotive near Detroit.
The filing doesn't necessarily mean the end for A123 System's operations. The company sold its automotive unit to parts maker Johnson Controls Inc., which plans to keep A123 plants open and sell the company's lithium-ion battery technology.
Almost instantly, A123 became an issue in the presidential campaign.
The bankruptcy is "yet another failure for the president's disastrous strategy of gambling away billions of taxpayer dollars on a strategy of government-led growth that simply does not work," Andrea Saul, spokeswoman for Republican challenger Mitt Romney, wrote in an e-mail.
Obama's campaign countered, saying the investments have more than doubled renewable energy production from wind and solar sources, creating jobs and bringing manufacturing back to the country. The administration has said the "vast majority" of companies that received loans are still expected to pay them back in full, with interest.
A123 joins solar panel maker Solyndra LLC as another example of companies that got government money but failed. The politically connected and now bankrupt Solyndra left taxpayers on the hook for $528 million after it could not repay a government loan.
The government also made millions in loans to electric car makers Tesla Motors and Fisker Automotive, both of which are struggling. Tesla has never made a profit but is starting to repay its loans, while Fisker is trying to raise money so it can build a car that's less expensive than its $100,000 Karma.
Bragman said that although the government will lose cash, its seed money was needed to foster the electric car and battery industries. Other governments such as Japan and China, he said, play similar roles in growing new industries.
A123's demise as an independent business reflects the problems of the electric-car industry. Americans have been slow to buy the vehicles because they're expensive, and many models have limited range and can run out of power on longer trips. Lackluster sales of EVs and batteries left A123 with huge losses and a plunging market value.
Martin Zimmerman, a former Ford executive and now a professor at the University of Michigan, said electrics still cost too much and don't make financial sense when compared with efficient gas-powered cars.
"This is one in a series of news stories recently that says the commercialization of this technology is not as imminent as might have been thought," he said.
After the news hit, A123's already depressed stock price fell even further. The shares closed at 6 cents Tuesday. They traded for more than $20 on the day of its initial public offering in 2009.
Unlike a loan, A123's government grant was never supposed to be repaid. The company had to match the money as it was used. It received $132 million of the grant.
The government stimulus grant was used to help build plants in the Detroit suburbs of Livonia and Romulus.
The company also got a $6 million research grant in 2007 under the Bush administration, the Energy Department said.
Under Tuesday's deal, Johnson Controls will pay $125 million for A123's lithium-ion battery technology, other products and customer contacts. It will also take over A123's two Michigan factories, cathode ray factories in China and an equity interest in a Chinese battery company.
Johnson Controls planned to keep the factories running but said it was too early to give details about A123 employees or customers.
A123 said it expects to continue operations as it moves toward the sale to Johnson Controls. The company said it is in talks to sell its grid, commercial, government and other operations that weren't purchased by Johnson Controls.
The company was to supply batteries for the new all-electric Chevrolet Spark subcompact from General Motors Co. It also has a contract with BMW AG.
A123 has struggled for several years, and ran into serious trouble this spring after a costly recall of its batteries. Bragman said it wasn't able to recover from the expense.
The company warned that it might not be able to stay in business unless it got more financing, and just two months ago, it announced a $450 million lifeline from Chinese auto parts maker Wanxiang Group Corp. But A123 said Tuesday that the deal has been scrapped.
A123 subsidiaries outside the U.S. were not included in the bankruptcy filing.