The announcement sent Qantas shares down as much as 4.3 percent to a two-week low.

Qantas (QAN.AX) had said it was in talks with Malaysian Airlines (MASM.KL), budget carrier Air Asia (AIRA.KL) and Singapore to set up the carrier with one of them, but recent reports indicated talks had run into rough weather over capital investment and size of stakes.

"It is quite disappointing. Malaysian was the best chance for a tie-up. This will delay the recovery," said David Liu, head of research at fund manager ATI Asset Management, which owns Qantas shares. Liu said he was still positive on the shares.

"The options left for them are revisiting the option of Singapore as an Asian hub, better fleet use and leaning more on JetStar International," he said referring to Qantas' low-cost airline.

Qantas chief Executive Alan Joyce, who was named the nation's most influential business leader in 2011 by the Australian newspaper, had staked almost everything on tapping Asia's low costs to turn around the international operations.

Joyce reiterated in a statement on Friday the plan remained a priority. In February, he had told Australian lawmakers Qantas should "adapt or die."

Qantas said it "continued to explore opportunities in the region, including joint ventures and alliances.

"However, mindful of global economic uncertainty, and consistent with Qantas' focus on disciplined financial management, the group will allocate minimal capital to such ventures."

The plan for an Asian premium carrier was part of a five-year strategy to revive Qantas' international operations, which lost over A$200 million in the 2011 financial year.

STIFF OPPOSITION

Unions and politicians have opposed the plan, saying the intent was just to shift jobs overseas and sidestep a law to keep Qantas Australian.

"It (Qantas) needs a management which is prepared to build on the strengths instead of consuming energy pursuing half-baked, adventurist plans in Asia," Richard Woodward, vice president of the Australian and International Pilots' Association, said in a statement.

"Qantas has two core brand strengths: unique Australian identity and an unparalleled safety reputation built on the highest Australian standards. Focus on these if you want to strengthen the airline."

Setting up an airline in Asia would let Qantas hire pilots, crew and maintenance staff at much lower costs than in Australia and offer a larger choice of connecting flights.

Personnel costs at Qantas stand at about 25 percent of revenue, compared with about 15 percent for its Asian competitors.

Last month, the airline said it would axe 500 jobs, cut capital spending by A$700 million over two years, review and simplify its maintenance operations, withdraw from unprofitable routes and retire early older aircraft to protect profitability.

The turnaround strategy also includes restructuring the international network and raising the focus on Asia.

The Australian Licensed Aircraft Engineers Association said in a statement that the collapse of talks over the "fanciful Asian venture would hopefully pave the way for investment onshore."

Last year, Qantas grounded its entire fleet for almost two days, seeking to bring long-running industrial action with a number of unions to a head through the intervention of the industrial labour umpire. Qantas has since settled with unions.

Qantas, one of two global airlines along with Southwest Airlines (LUV.N) still to boast an investment-grade rating, saw Moody's cut its credit rating by a notch in late January, citing pressure from high fuel prices and difficult operating environment.

By afternoon, Qantas shares had trimmed losses to trade 2.5 percent lower at A$1.68. In early trade, Malaysian Airlines shares were off 0.7 percent.

(Editing by Muralikumar Anantharaman)

• A Permanent Economic Emergency