March 1 (Bloomberg) -- Volkswagen AG, which dropped plans to purchase a stake in Proton Holdings Bhd. in January, is in talks with Cycle & Carriage Bintang Bhd. for a dealership agreement in Malaysia, Cycle & Carriage said.

Cycle & Carriage Bintang, almost 60 percent owned by Singapore-based auto distributor Jardine Cycle & Carriage Ltd., said it is in ``preliminary discussion'' with Volkswagen Group Malaysia Sdn.

``The proposed dealership is in line with the group's strategy to broaden its revenue base and enhance its position as one of the leading multi-franchise operators in Malaysia,'' Cycle & Carriage said yesterday in a filing to the stock exchange.

Cycle & Carriage distributes Mazda, Peugeot and Mercedez- Benz products in Malaysia. Vehicle sales are expected to increase 2.5 percent in 2006, which would be the slowest pace in three years, as stricter lending and higher interest rates curb demand, according to the Malaysian Automotive Association.

Car sales may be affected after Malaysia yesterday raised retail gasoline and diesel prices by as much as 23 percent, the fifth increase since May 2004, to trim fuel subsidies.

The increase may spur inflation and force the central bank to raise interest rates. Bank Negara Malaysia last week raised its key interest rate a second time in three months to curb inflation, increasing the overnight policy rate a quarter-point to 3.25 percent. Malaysia's inflation rate has more than doubled in the last year.

Volkswagen is also in talks with Proton Holdings for cooperation on projects which may include a dealer network and the supply of products and parts, Proton, Malaysia's biggest carmaker, said on Jan. 27.

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

Last Updated: February 28, 2006 19:19 EST