The on-again, off-again tie-up between Malaysian national carmaker Proton Holdings and Germany's Volkswagen may at last happen, with a deal possible in New York as early as this week.

New York is the setting for a meeting of the two car companies, industry executives said, because Malaysian investment bank CIMB is leading a road show there which includes executives from state investment agency Khazanah Nasional and Malaysian conglomerate Sime Darby as well as senior officials from the Prime Minister's Department.

Khazanah is a 42 per cent shareholder of Proton, and Sime's chief executive, Zubir Marshid, is said to be close to Volkswagen's top management.

It is not clear whether Mr Zubir was involved in bringing about the meeting, but Volkswagen's officials have apparently agreed to see Khazanah and the officials from the Prime Minister's Department in New York to hammer out some kind of agreement, the industry officials said.

The speculation pushed Proton's shares up 7 per cent to RM5.65 apiece yesterday.

However, there is a problem over the kind of agreement that might emerge.

Already last week, the markets were confused by the various statements emanating from the government.

Prime Minister Abdullah Ahmad Badawi said on Wednesday that Volkswagen was no longer interested in a strategic alliance with Proton.

On Friday, his statement was contradicted by both Nor Mohamad Yakcop, the second finance minister, and Khazanah chief Azman Mokhtar, who said that talks with Volkswagen and with America's General Motors, which has also expressed interest in Proton, 'were ongoing'.

On the other hand, Deputy Prime Minister Najib Razak seemed to indicate that the government was unlikely to allow Proton to come under foreign control.

But analysts almost universally agree that that is precisely what must happen, because the national carmaker is in deep trouble.

For its 2007 financial year, Proton posted a net loss of RM591 million (S$266 million), with turnover down by 37 per cent.

It also saw a four percentage point drop in market share to 22 per cent.

Meanwhile, the continual losses are shrinking the firm's net asset value.

Proton is being squeezed by rising competition in a market which is gradually being opened up. The company has no new models to speak of while would-be car buyers are facing more stringent credit screening.

Once Malaysia's largest seller of cars, Proton is now in danger of being pushed into third spot behind Perodua, another national carmaker which is majority-owned by Japan's Daihatsu.

The Malaysian unit of Toyota is fast catching up, too.

Analysts suggest that the Perodua-Daihatsu partnership could be a pattern for Proton and Volkswagen to follow. With VW equity in Proton, the reasoning goes, commitment will follow.

Why Volkswagen? A recent CIMB research note praises VW for its 'track record of turning around the once-ailing Skoda (a loss making Czech brand), its extensive global network and its strong brand name'.

In the words of Mr Azman of Khazanah, Proton itself is 'not without its attractions'. Whoever buys into Proton also buys into South-east Asia's largest passenger car market, and gets access to assets including a modern assembly plant which is sadly under-utilised.

The government seems reluctant to surrender control of Proton for reasons that are not wholly clear. However, one reason could be a fear of lay-offs at a Volkswagen-controlled Proton.