The US has told Malaysia that it will not be able to conclude a free-trade agreement this summer as hoped.
The two sides have failed to meet a deadline to secure a deal before President George W. Bush's fast-track trade authority expires in June.
These powers allow speedy consideration of any trade deal by the US Congress.
Access to Malaysia's car and banking industries and worries over laws giving Malay firms preference for government contracts have clouded discussions.
'Outstanding issues'
Officials opened talks a year ago on a free-trade deal which it was hoped could double the existing $44bn flow of two-way trade between the countries.
But progress has been slow amid political concerns in Malaysia about the extent to which trade in key manufacturing and service industries would be liberalised.
"Submission of a US-Malaysia free trade agreement under the current trade promotion authority is not possible"
A senior Malaysian negotiator said last month that he was not optimistic that agreement could be reached by 31 March, the three-month deadline required for Congress to consider the proposals before the end of June.
Washington confirmed that although talks between the two countries would continue, the chance of a deal being agreed this summer had now disappeared.
"At this point, submission of a US-Malaysia free-trade agreement under the current trade promotion authority is not possible," said trade official Stephen Norton.
"Significant progress has been made toward conclusion of such an agreement but a number of important issues remain outstanding."
Many Malaysian businesses are keen to conclude a trade deal similar to the one that the US agreed with neighbouring Singapore in 2003.
But divisions over how far protected industries such as banking and car production should be opened up have held up negotiations.
South Korean rush
President Bush's trade authority, through which he can ask legislators to have a single vote on a treaty without amendments, has not been extended by the Democratic Congress.
As a result, long-running negotiations with South Korea on a similar free-trade deal are also in peril ahead of next week's deadline.
US negotiators will make a last-ditch effort to secure agreement in Seoul next week after making some progress on disputed areas such as beef and rice imports.
South Korea is already Washington's seventh-largest trading partner and a free trade deal would represent the largest US agreement of its kind since 1993's North American Free Trade Agreement (Nafta).
Concluding bilateral trade deals with key allies is a cornerstone of the Bush administration's policy in Asia.
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