The United States warned today that the failure of free-trade talks with Malaysia would send a message the two countries were "not open for business", and said next week's round would be critical.

Deputy US Trade Representative Karan Bhatia said that the fifth round of negotiations to be held in Sabah's Kota Kinabalu was a "window of opportunity" as Washington races to seal an agreement before a March deadline.

"The reality of it is we have this limited period of time and this fifth round is a major opportunity to take a step forward," he told a press conference.

However, if no real progress is made, "many would wonder if coming together in the time remaining is feasible," he said.

"I think it would be very difficult to see how then (to proceed), with the time remaining," he added, warning that there would be significant fallout if the two sides failed to strike a deal.

"It would first of all send an unfortunate message that our countries are not open for business," he said.

"It will drive investors elsewhere, I'm concerned, and it will create potential frustrations in the bilateral economic relationship."

Sensitive issues

Washington wants to conclude negotiations on the free trade agreement (FTA) by the end of March, in time to present the deal to Congress before the president's fast-track Trade Promotion Authority expires on July 1.

However Malaysian Trade Minister Rafidah Aziz has said she doubts the negotiations will meet the deadline, with talks bogged down in sensitive areas including the services sector, investment and government procurement.

The US is seeking access to lucrative Malaysian state contracts, which favour the country's majority ethnic Malays and indigenous groups, or "bumiputeras" as they are known.

Bhatia said Washington had no intention of undermining Malaysia's preferential policies but called for greater transparency in the international tender processs.

"One of the key challenges that have been expressed to us by our companies is ensuring clarity and transparency in those processes," he said.

"We are not looking to undermine the bumiputera preference policies, we have heard the Malaysian government clearly on this and we believe there are some concerns that need to be addressed in the broader tender area."

Opposition to the FTA has been growing among Malaysian activists who say the talks lack transparency and that livelihoods could be damaged by possible concessions to the US.