Proton and VW have ended talks about a possible tie-in.
The discussions had been ongoing for more than two years, with VW reportedly lining up an equity stake in the Malaysian car manufacturer.
In a statement VW said it has other priorities and that a potential collaboration with Proton could not be pursued.
The Malysian government has long said it is looking for a foreign car maker to buy a stake in Proton. Both General Motors and PSA Peugeot-Citroen have been rumoured as possible partners in the wake of the VW talks collapsing.
Proton's appeal is heighten as Malaysia imposes tariff controls on imports, making them much more expensive than locally built cars.
The Malaysian government has indicated a partner of Proton would be given greater freedom on these tariffs.