Malaysian officials said Friday talks were back on with Volkswagen in an apparent last-ditch attempt to forge a strategic alliance for besieged national carmaker Proton.

Prime Minister Abdullah Ahmad Badawi had said late Thursday talks with Volkswagen have failed, leaving the struggling carmaker with few options for a foreign partnership seen as vital to Proton's fortunes.

"I have decided, since Volkswagen is not interested in the proposal that Proton wants in terms of equity, Proton needs to talk to other people," Abdullah was quoted as saying by the state Bernama news agency.

But in what has become a long-running saga to find a partner for Proton, a senior government official Friday said the talks were back on.

"After the prime minister made the announcement, Volkswagen requested a final round of talks," the official told AFP.

State investment arm Khazanah Nasional owns a controlling 42.7 percent stake in Proton, and managing director Azman Mokhtar also said negotiations were ongoing with Volkswagen as well as US motor giant General Motors.

Larger net losses

"Volkswagen and GM remain in the picture," Azman told reporters.

Abdullah has said that Malaysia will turn to General Motors if talks with Volkswagen were to fall through.

Nearly six months of negotiations with French car giant PSA Peugeot-Citroen for an alliance collapsed in March while talks with Mitsubishi of Japan have also been unsuccessful.

The news came as Proton posted larger than expected net losses of RM591.36 million (US$174 million) for the year to March 2007.

The carmaker blamed weak auto sales amid stiff competition and higher production costs for a reversal from the year earlier profit of RM46.69 million.

"They have to turn around. They cannot be going on making losses," Abdullah said of the results.

"They have to do whatever they think is necessary," he added, when asked if Proton needed to revamp its top management.

The government is under intense pressure to forge a partnership between Proton and a foreign auto manufacturer to provide the ailing company with expertise to arrest a sharp decline in market share.

It has so far missed two self-imposed deadlines to find a partner for Proton and the government Friday set a new timeframe.

"We will decide on the partner for Proton within the next three months," Second Finance Minister Nor Mohamed Yakcop was quoted saying by Bernama.

Malaysia owns 59 percent of Proton and analysts have partly attributed difficulties in forging partnerships over the government's reluctance to cede control of such a key national company to foreign hands.

Foreign partner preferred

A previous round of talks with Volkswagen broke down in January 2006 after Proton rejected what it said were "inappropriate" plans by the German carmaker to exert control over Malaysian firm.

Three Malaysian automotive companies have expressed interest in acquiring all or part of the government's stake.

Analysts, however, said a local partner would not provide Proton with technology to develop new models or help expand its markets overseas.

"The end game is that Proton has to get a foreign partner. A local partner will not solve its woes," Kurnia Insurans chief investment officer Pankaj Kumar said.

"The Malaysian market is too small. Proton has the production capacity and if it's not utilised, it's a waste," Pankaj told AFP.

Despite the prospect of a deal with General Moters, analysts also said Proton's bargaining power had decreased.

"Even if GM is still at the negotiating table, we are no longer excited about an alliance as GM is struggling to regain its global market share and in Malaysia," investment bank CIMB said in an advisory to clients.