Things are getting tougher for an ailing Proton as the Malaysian Prime Minister announced that the long-running talks of a deal with Volkswagen will now cease.

Lengthy negotiations between Proton Holdings and Volkswagen have fallen through after the Malaysian government decided that the German company’s proposal for Proton did not meet their expectations.

Proton has been struggling since the deregulation of the Malaysian motor industry and mounting competition from Korean and Japanese car manufacturers whose products are rapidly eating up Proton’s share of the international market.

Although the company has made great advances in the design of such competitively-priced models as the Satria Neo, it is still a long way behind it’s competitors in terms of safety and handling. Proton hoped that an alliance with a large automotive company would enable it to glean improved technology and share platforms without incurring massive costs.

quoted the Malaysian Prime Minister, Abdullah bin Haji Ahmad Badawi as saying, "I have decided, since Volkswagen is not interested in the proposal that Proton wants in terms of equity, Proton needs to talk to other people."

Abdullah also said that Proton had to improve its performance after it reported a fourth straight quarterly loss on Thursday.

Both Volkswagen and General Motors had expressed an interest in acquiring a stake in Proton. Volkswagen was expected to make a deal with Proton, but neither party managed to make an offer by the government's late-March deadline.

It now look as though Volkswagen is planning to establish a regional assembly facility in nearby Indonesia, according to government officials in Jakarta. Among the alternative options for Proton is an alliance with an, as yet unnamed, local assembly partner in Indonesia.

In spite of it’s recent ordeals, it appears that GM is still interested in buying the ailing company. The more realistic scenario is that a third party bank or finance company will end up being the successful bidder.