Suzuki Motor is seeking an end to its partnership with Volkswagen, after the German carmaker accused Suzuki of breaking the terms of their agreement.
Suzuki will ask Volkswagen to sell its 19.9% stake in the firm, the company said in a statement.
The Japanese car company, in turn, will offload its 1.5% stake in Volkswagen.
Volkswagen argued that a deal between Suzuki and Fiat for diesel engines was a contractual breach. Suzuki has denied that the deal broke the agreement.
Volkswagen bought its 19.9% stake in Suzuki for 1.7bn Euros ($2.3bn; £1.4bn) in December 2009.
The partnership was supposed to be a way for Volkswagen to gain access to the Indian market for small cars, through Suzuki's leading position in the country.
The companies had also said they intended to co-operate on technology and expansion in emerging markets. However, no joint projects have begun almost two years into the deal.
Analysts said the alliance had failed to benefit either company.
"They entered into this agreement without any clear roadmap about what they were going to do" said Christopher Richter of CLSA Asia-Pacific Markets. "It was a poor fit right from the start."
Koji Endo of Advanced Research Japan added that contrasting corporate cultures and ideologies had also hurt the tie-up.
"One [Volkswagen] is a very big company trying to become the world's biggest car maker, the other [Suzuki] is a relatively small company trying to focus on key regional markets," Mr Endo told the BBC.
Analysts said that given Volkswagen's domination in the global markets, the German car maker had wanted to be a lead player in the partnership, a policy that had created more differences between the two companies.
"[Volkswagen] must have thought they will lead the project, but that hasn't gone down well with Suzuki," said Mr Endo.
Volkswagen's allegation that Suzuki violated the agreement between the two companies centres around Suzuki's relationship with Italian carmaker Fiat.
Suzuki had formed an alliance with Fiat in 2005 to make diesel engines in Asia.
In June, Suzuki decided to buy diesel engines from Fiat for cars built in Hungary, expanding the partnership between them.
Volkswagen had said it would give Suzuki several weeks to remedy the infringement and that it did not mean to end the partnership.
However, analysts said Suzuki had already incorporated the engines into their cars and to change the supplier would incur extra costs for the Japanese carmaker.
"It will take a fair bit of redesign of their cars in order to incorporate Volkswagen engines in those models," Christopher Richter of CLSA Asia-Pacific Markets told the BBC.
"It will require a larger investment on Suzuki's part," he added.
Mr Richter said that meant Suzuki would either have to lower its profits or pass on the added cost to the consumers, both of which were not viable options.
"When you look at the markets that Suzuki is catering to, pricing is one of the keys to success," Mr Richter said.