The Malaysian government and Volkswagen, the world’s fourth-largest carmaker, have ended talks without reaching a deal. It marks the second failed attempt by Volkswagen in two years to build up a production base in Southeast Asia.

Meanwhile the Malaysian government appears to have had enough, announcing today it would not seek a foreign partner for the ailing Proton for the time being.

The German manufacturer has long been interested in strengthening its position in Southeast Asia, initially announcing a a long-term strategic partnership with Proton in October 2004. However not everything went to plan as the Malaysian government ruled out a possible take over by VW which angered the Germans into leaving in January 2006.

The loss-making Proton was set up in 1983 by then Malaysian Prime Minister Mahathir Mohamad and was successful for the first two decades under the protection of a high tariff on imported cars. But since barriers to competition started coming down, it has lost market share to international rivals and Malaysia’s second biggest manufacturer Perodua.

The Malaysian government has also held talks with PSA/Peugeot-Citroen of France, as well as VW and GM, but all have proven futile.

The failure to reach a deal with Proton is mainly due to the Malaysian government’s fear of ceding management control to a foreign company, as well as being heavily lobbied by other manufacturers who fear the Europeans could flood the market.

Nonetheless analysts close to Proton doubt the company can survive in the long-term without a strategic partner and Volkswagen seemed to be the best, having done such a great job with Czech car-maker Skoda.

Volkswagen issued a statement today saying the company will now independently examine other possibilities to enter the Southeast Asian market and further strengthen its sales operations in the region including Malaysia.