Volkswagen has halted tie-in talks with Porsche, saying the smaller company is not ready for a merger.
VW and Porsche had planned to meet today to develop plans for a tie-in, as a result of Porsche's problems meeting payments on loans it has taken out as it built up its shareholding of VW.
However, these talks have now been called off.
"We recognised at the end of the week that Porsche is lacking several fundamental conditions for the discussions," said a VW spokesman.
It is believed VW wants Porsche to present a clearer idea of how it will restructure in teh wake of the tie-in.
Despite Porsche already owning more than half of VW, it is fighting for influence in the proposed tie-in because of its heavy debts. It is widely expected that any merged company would be run from VW's base, and under the stewardship of current VW executives.