PSINet, the largest independent internet access provider in the US, yesterday warned that it was running out of cash and was likely to file for bankruptcy protection.

The company, which was founded in 1985 and listed on the stock exchange 10 years later, is one of the largest corporate casualties from the meltdown in the valuation of internet-related shares.

Trading in PSINet shares was halted on the Nasdaq exchange yesterday after the company outlined the extent of its financial travails. The shares were frozen at 18 cents, down from a year's high of $34. At yesterday's level the company, which operates in 27 countries on five continents as a result of its expansion over the past five years, was valued at less than $36m.

PSINet also revealed that PricewaterhouseCoopers, its financial auditor, might officially question its ability to continue as a going concern. A statement issued before markets opened yesterday blamed "rapidly changing circumstances impacting the company".

At the end of March the company held cash or equivalents of $254m, about $27m of which is being used as credit security. With more than 4,000 employees, the company is burning large amounts of cash each month. Like many internet companies struggling to reach the consumer market, PSINet has also spent heavily on advertising.

In its statement yesterday, PSINet admitted that even a proposed sale of its assets might not cover debts. "Cash generated by the expected proceeds from asset sales are not expected to be sufficient to meet the company's anticipated cash needs" in the absence of "successful imple mentation of one or more financial or strategic alternatives currently under consideration.

"Even if one or more of such alternatives is successfully implemented by the company, there can be no assurance that the company will not run out of cash."

Goldman Sachs, the investment bank, has already been appointed to look for a strategic alliance or sale of all or part of the company. Dresdner Kleinwort Wasserstein has been hired to look at ways of restructuring its debts.

PSINet said yesterday that such reorganisation was "likely to involve the company's reorganisation under the federal bankruptcy code". Once a company files for chapter 11 bankruptcy protection, prospective purchasers avoid responsibility for its debts.

Authorities at Nasdaq requested more information from the company, which has 15 days to file a financial statement based on a new valuation of its "potentially impaired assets". The company went on to add that even if its attempt to restructure was successful "there can be no assurance that the company will not run out of cash".

PSINet has already spun off its overseas consumer internet service operations and data networks business, and announced a large restructuring charge for last year.

The company was founded by William Schrader and Martin Schoffstall, who installed a regional network that linked New York State academic institutions.

In 1989, when the corporate potential of the internet was still in its infancy, PSINet was the first company to provide net access for businesses.