TOKYO/GENEVA - Japan's Mitsubishi Motors Corp and France's PSA Peugeot Citroen failed to agree terms for a capital alliance but said on Wednesday they would continue talking about expanding business ties.

PSA chief executive Philippe Varin told Reuters at the Geneva auto show that conditions for a deal were not right, and there were no plans to reexamine a capital tie-up.

The two carmakers had announced in December the start of talks to form a strategic partnership to build on existing project-based ties such as SUVs and electric cars, and Mitsubishi said a capital alliance could be part of that deal.

PSA was eyeing a 30-50 percent stake in Mitsubishi for up to 300 billion yen ($3.4 billion), a deal that would give the struggling Japanese carmaker a much-needed infusion of capital, the Nikkei newspaper reported at the time.

Mitsubishi and PSA said in a joint statement on Wednesday that President Osamu Masuko and PSA CEO Varin met at the Geneva motor show and confirmed their intention to expand operational ties but concluded a capital alliance would not be realistic.

There were conditions in terms of finance and value, etc. We met last night, we talked about it and we decided the conditions were not met, Varin told Reuters on the sidelines of the Geneva auto show.

For the PSA group there were conditions to fulfill for any development outside the group -- that it creates value for shareholders and that it is not inconsistent with the return to better financial health (of the group), he told reporters.

Asked if the conditions could change and the matter could be reexamined, he told Reuters: a capital tie-up is not a subject we are keeping on the agenda for the moment.

Mitsubishi needs a strategic partner to survive, while PSA wants global scale to become less reliant on stagnating European markets, where government subsidies are running out.

That Franco-Japanese alliance is also looking to lead the industry in the unproven electric car segment where Mitsubishi Motors is among the only players to have a car on sale.

Although Mitsubishi has good technologies, it is negative news for the company to have lost a way to raise money, said Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management.

Shares of Mitsubishi closed up 0.8 percent at 132 yen in Tokyo ahead of the announcement, outperforming a 0.3 percent rise in the benchmark Nikkei average. PSA shares were up 0.77 percent at 20.36 euros at 1304 GMT.

(Additional reporting by Yumiko Nishitani, Gilles Guillaume, Chang-Ran Kim; Editing by Nathan Layne and Hans Peters)

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