Chrysler and Chery Automobile have cancelled a cooperation agreement to build small cars in China.
The deal - in which both manufacturers would unite to jointly produce small cars for South America, North America and Europe - was signed in 2007 and was one of the US car maker’s biggest overseas projects.
Chrysler would have benefited from low manufacturing costs, while Chery would have taken advantage of a brand recognised in the western world.
But plans to launch a cheap new small car were delayed after Chrysler and Chery struggled to bring the model up to Western safety and environmental standards.
The termination of the project will come as a body blow to struggling Chrysler, which is currently asking for $15 billion bailout from the US government.
Chrysler has been seeking partnerships with other manufacturers for the past two years. It has failed to build a presence in markets outside the US, and sells just 10 per cent of its vehicles abroad.
The company is currently linked with Renault-Nissan, and Renault-Nissan boss Carlos Ghosn is keen have an American partner. Nissan is scheduled to build a small car for Chrysler in Japan from 2010.
Previous behind-the-scenes merger talks between the two firms were reported to have stalled last year.