The ending of talks on the venture comes against a background of growing gloom in the global automobile industry.
Chrysler – along with fellow US auto giants Ford and General Motors – are currently seeking assistance from the US government to avoid financial collapse.
The company had hoped its partnership with Chery would enhance its small-car line-up following its split with Daimler, the German manufacturer, in May 2007.
Chery also wanted ties with Chrysler to improve its technology and spur its expansion in the United States and other Western markets.
Chrysler and the General Motors Corporation say they are seeking a total of $14bn to $15bn in assistance to survive through to early 2009.
The Ford Motor Company has said it has enough money to stay afloat unless one of the other so-called "Big Three" US car manufacturers collapses or the global economy further deteriorates.
Sales in China's fast-growing auto market, which is the world's second-largest, have also weakened as a result of the global credit crisis, but not as severely as in the United States.