Malaysia's proposed RM71 billion (US$20 billion) merger to create the nation's biggest bank is likely to be scrapped after CIMB Holdings and RHB Capital failed to agree on new deal terms, people familiar with the matter told Reuters .

The merger would have formed a banking group with assets of about US$190 billion, eclipsing Malayan Banking Bhd (Maybank) and making it South-East Asia's fourth-biggest bank.

The state-backed deal was part of Malaysia's ambitious plan to promote its firms as regional champions.

However, a collapse in CIMB share price since the deal was announced in October has made it unattractive, prompting RHB to seek an improved share swap ratio, and possibly cash, people familiar the with the situation said.

Shares in CIMB rallied more than 10 percent on Tuesday on news of a possible deal collapse, while RHB rose 1.8 percent and Maybank was flat. Malaysia's benchmark share index was up 0.2 percent.

The scrapping of the deal will be a major blow for CIMB chairperson Nazir Razak ( left ), the brother of Prime Minister Najib Abdul Razak. Nazir spearheaded the bank's expansion over the past 16 years, snapping up a domestic rival, lenders in Indonesia and Thailand and businesses owned by Royal Bank of Scotland.

Board members of the banks will meet tomorrow to call off the transaction, Malaysian newspaper The Edge said today, adding that an announcement will be made by the end of the week.

"There is no further development in relation to the merger at this juncture. Further updates will be made should there be any development," RHB said in a statement.

CIMB and MBSB declined to immediately comment.

If the deal was called off, it would add to recent issues with state-linked Malaysian firms after 1Malaysia Development Bhd missed the repayment of a RM2 billion (US$563 million) bridge loan that was due end-December.

The deal is in trouble at a time when the economic environment for Malaysia has worsened, one of the sources on the deal said.

Bank of America Merrill Lynch economists in a report last month said Malaysia faces the risk of a "double miss" on both its economic growth and fiscal deficit as oil-related revenue could come in 40 percent below the government's projection.

The investment bank cut its gross domestic product growth forecast for Malaysia to 4.6 percent from 5 percent in 2015 and expects the fiscal deficit to come in at 3.8 percent of GDP, above the government's 3 percent target.

- Reuters