The BBC's Humphrey Hawkesley reports from Kuala Lumpur looks at the context to the Apec summit

Canadian Trade Minister Sergio Marchi said the Asia-Pacific Economic Cooperation forum would now submit the trade proposal to the World Trade Organisation for resolution.

The pact, which would have lifted tariffs on nine key industries, has foundered on Japanese objections.

Trade and foreign ministers from the 21-member Apec forum, meeting in the Malaysia capital, Kuala Lumpur, had hoped to conclude the pact for Apec leaders to sign during their summit there on Tuesday and Wednesday.

BBC's Simon Ingram: The obstacle of Japanese domestic opinion

"There's not enough of a critical mass here. So the package essentially goes to the WTO, and ultimately to New Zealand," where Apec leaders will meet next year, Mr Marchi said.

US and Japan at loggerheads

Leaders will thrash out their differences at this hotel

Japan has refused to cut customs taxes in two sensitive areas - forestry products and fish - at a time when its economy is in recession.

The United States argued that Japan had to agree in all nine sectors to give the pact weight.

Washington said this would send a strong signal that Asia was not turning protectionist, despite its worst economic crisis in 50 years.

The original aim was to have the tariff reductions in the nine sectors effective by 2002, as a start toward Apec's ultimate goal of a free trade area in the Pacific by 2020.

The Pacific rim forum accounts for 55% of world trade worth $5.2 trillion.

The nine sectors Apec wants to open up are environmental goods and services, fish, forest products, medical equipment, energy, telecommunications, toys, gems and jewellery, and chemicals.

Host's moves towards protectionism

The summit - aimed at promoting economic recovery in the region - is being hosted by Malaysia, whose prime minister has moved towards economic protectionism.

Dr Mahathir Mohamad's recovery plan amounts to a total rejection of the International Monetary Fund prescription of economic austerity and open markets.

His former deputy, Anwar Ibrahim, favoured a more cautious approach which is one of the reasons he was sacked.

Mr Anwar's dismissal has sparked violent calls for reform in a country suddenly plunged into recession.

The BBC Asia Business Correspondent, David Willis, says the irony of holding a free trade summit in a country that has such grave doubts about the benefits of globalisation is not lost on officials.