African leaders have refused to adopt a democracy charter that would have made it more difficult for unpopular presidents to stay in office.
The AU wants Sudan to allow the UN to take over in Darfur
The charter was supposed to strengthen the electoral process, end military coups and stop constitutional changes to let leaders stay in office.
But ministers refused to agree to the last point, says South Africa's foreign minister Nkosazana Dlamini-Zuma.
The African Union summit is still set to discuss Sudan and Somalia.
At a summit in the Gambian capital, Banjul, the AU will try to persuade Sudan to allow the United Nations to take over the stretched AU peace mission in Darfur.
The situation in Somalia is also to be discussed, after an Islamist group took control of the capital, raising fears of conflict with the weak government.
Fifty-two villas and a huge hotel and conference centre have been built in just under six months just outside Banjul, to accommodate the heads of state, AFP news agency reports.
UN Secretary General Kofi Anan will also be in Banjul this weekend where he hopes to meet President Robert Mugabe about Zimbabwe's political crisis.
But the veteran Zimbabwean leader has been talking tough ahead of suggestions of such mediation.
"We may be suffering, yes, but we will never die. What we need is support for the economy," Mr Mugabe said this week.
Other world leaders known for their anti-Western stance - Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad - will also be attending the summit.
The fate of Chad's former President Hissene Habre is also to be decided by the AU leaders.
Mr Habre, who has been living in exile in Senegal for years, is wanted in Belgium for alleged abuses committed under his rule between 1982 and 1990.
The democracy charter would have condemned any unconstitutional change of power, as well as any refusal to accept defeat and hand over power after losing an election.
Those who break these rules would have faced suspension from the AU.
"The charter has been sent back, so that it can't be adopted unless the heads of state disagree with the ministers, which is unlikely," Mrs Dlamini-Zuma said.
"The main contention was around the clause that talks about people not being allowed to manipulate the constitution to extend their terms of office," she said.
Fifteen of Africa's 53 leaders are former military rulers, including host President Yahya Jammeh of The Gambia.
Those who stage coups already face automatic suspension.
Before heading for Banjul, President Omar al-Bashir told a rally in Khartoum that deploying international troops in Darfur would be tantamount to foreign occupation.
The AU's special representative for Darfur, Babagana Kingibe, put a brave face on the situation, pointing out that there was still a dialogue between the UN and the Sudanese government, with plans for President Bashir to meet Mr Annan over the weekend.
"In politics, nothing is ever settled until it is settled," Mr Kingibe said.
The AU's own position at the moment is to stress its determination to end the peacekeeping operation by the end of September.
A recent AU-brokered peace deal has failed to end the violence in the region, where more than 2m people have fled their homes in the last three years.
If Sudan gave its consent, a UN official said this week that it would send a force the size of a division - thought to be about 17,000 troops - to Darfur in January next year.