Troubled Chrysler LLC cancels plans to develop a low-cost small car with China-based Chery Automobile Co. Ltd.

The alliance was expected to supply Chrysler with 12 vehicles spanning three segments.

Mike Manley, Chrysler’s executive vice president-international sales and marketing, says in a statement the auto makers “have mutually agreed that it is in each company’s best interest to conclude their discussions on a strategic cooperation agreement.”

Talks had been ongoing since July 2007.

“The two companies will shift resources to independently pursue their business objectives,” the statement says.

Last year, Chrysler sought to relocate additional engineers in China, doubling its contingent of engineers and procurement personnel assigned to the Chery program. The move was in response to shortfalls in Chery’s operations.

Chrysler CEO and Chairman Robert Nardelli said at the time: “You have to vet all of these opportunities. We’re just looking at that as any prudent company would do to make sure that (the Chery-built small car) meets all of the expectations that our customers will demand.”

Vice Chairman and President Tom LaSorda also had vouched for Chery’s expertise, saying much of the auto maker’s tooling was identical to Chrysler’s.

Says Manley: “The economic situation and market environments around the world have changed significantly since the agreement was signed. Moreover, both companies have since gone through major internal changes and evolution, resulting in different business directions and priorities versus a year ago. As a result, many of the original premises the two companies had when entering into the agreement no longer apply.”

Manley does not disclose the value of the deal.

Meanwhile, Chrysler has a similar deal to acquire small cars from Nissan Motor Co. Ltd.

And Chery, which secured a 10 billion yuan ($1.45 billion) loan this week from the China Import-Export Bank, will use the money to improve its product quality, Chairman Yin Tongyao told the Shanghai Securities News during a company-sponsored event today in Shanghai.