Proton, the Malaysian carmaker, said on Tuesday that it had ended partnership talks with Volkswagen and General Motors, raising doubts about the long-term survival of the troubled state-owned venture.

Foreign investors saw the proposed sale of a large stake in Proton as a significant test of the government’s ability to restructure Malaysia’s sizeable state-owned industrial sector.

However, there is strong support for the independence of Proton within the ruling United Malays National Organisation, and the decision could be linked to general elections that are expected to be called soon.

Analysts say Proton needs a foreign partner to improve its technology and its network of car parts suppliers, which have been blamed for the carmaker’s poor quality record.

The Malaysian government said Proton could continue to operate without a foreign partner “for the time being”, citing a recent improvement in sales. Proton reported its first annual loss, of M$591m ($176m), in at least 17 years in 2006.

This is the second time in three years that Proton has failed to reach an agreement with VW, which is searching for a production base in south-east Asia to compete with global rivals that have a presence there. VW said it would continue to look for other opportunities in the region.

GM had also been in preliminary talks with Khazanah Nasional, the state investment company that is Proton’s main shareholder, with a 43 per cent stake. Both carmakers are believed to have sought a controlling interest in Proton’s modern but underused manufacturing facilities, which can produce up to 1m vehicles a year. Malaysia is south-east Asia’s largest passenger car market.

Khazanah had said that it hoped to conclude a deal with one of the two foreign carmakers by the end of the year. It said on Tuesday that the “issue of a strategic alliance, if necessary, can be considered at a later date”.

One reason for the strong political support for Proton is that many of its car parts suppliers are owned by ethnic Malay businessmen who help form the backbone of Umno’s support.

Malaysia has announced plans to produce an “Islamic car” in co-operation with Iran and Turkey to boost its meagre exports of 20,000 cars, which mainly go to small Asian markets such as Brunei and Bangladesh. Total sales amounted to only 130,000 cars last year.

Proton’s domestic market share has fallen from 60 per cent to 23 per cent in the past five years as tariff barriers have been reduced for foreign imports.

Proton is the last remnant of an ambitious industralisation policy for Malaysia that was launched by Mahathir Mohamad, the former prime minister, in the 1980s. Most of the other ventures, including steelworks, have collapsed.

Khazanah has established a good record recently of turning around other state companies, including Telekom Malaysia and power producer Tenega. Proton is seen as the biggest problem remaining on its books.