Merger talks between Honda and Nissan have collapsed after the firms failed to agree on a multi-billion-dollar tie-up.

The Japanese carmakers, along with junior partner Mitsubishi, had aimed to combine their businesses to fight back against competition from rival firms, especially in China.

The merger would have created an auto group worth $60bn (£48bn), and the world’s fourth-largest by vehicle sales after Toyota, Volkswagen and Hyundai.

The companies said they would continue their partnership on electric vehicles.

The planned tie-up was seen as providing Nissan, which for a while was Japan’s second-largest car company, with crucial relief following years of slowing sales and turmoil involving its top executives.

Both Nissan and Honda are also facing the prospect of tariffs in the United States, another major market.

In November, Nissan surprised shareholders with plans to lay off thousands of workers to tackle a drop in sales in China and the US.

The growing electric car market has been increasingly dominated by Chinese manufacturers, such as BYD.

This increased competition has left many of the world’s leading carmakers struggling to compete.

In March last year, months before they announced the merger plans, Nissan and Honda had agreed to explore a strategic partnership for electric vehicles.

“The talks started because we believe that we must build up capabilities to fight them, including the current emerging forces, by 2030,” Honda’s chief executive Toshihiro Mibe said, in reference to the Chinese competition. “Otherwise we will be beaten.”

Meanwhile, Taiwanese technology giant Foxconn has emerged as a possible investor in Nissan.

“If co-operation requires it (purchasing Nissan shares), we will consider it,” Foxconn chairman Young Liu told reporters on Wednesday.