The government had hoped the Confederation of Swedish Enterprise (Svenskt Näringsliv) and the Swedish Trade Union Organization (LO) could forge an agreement to create a package aimed at fighting the high employment rate among Sweden's youth.
However, Confederation of Swedish Enterprise head Urban Bäckström notified the union group on Tuesday that his organization was withdrawing from talks.
"I thought we'd get there, but this morning Urban Bäckström rang me and said that the Confederation of Swedish Enterprise had decided to say no to the proposal we had discussed," LO chairman Karl-Petter Thorwaldsson told Sveriges Radio (SR).
"Therefore, there will be no three-way agreement to create an employment package, which, for all of Sweden's unemployed youth, I regret very, very deeply."
He added that LO will have to find another forum to solve youth unemployment.
Finance Minister Anders Borg downplayed the significance of the news, stressing that key discussions will continue at the sector level.
"We've said the whole time that progress will be made at different speeds," he told Sveriges Television (SVT).
"It's one thing to not have a handshake at a central level, but what's critical is that we have an agreement at the sector level and those discussions will continue this spring."
Borg refused to pass judgment on the actions of LO or the employers groups, but stressed that "it would be a good thing" if both parties looked over what they could do.
"It would be great if we could have a discussion about flexibility in the labour market. That's something we'd naturally support," said Borg.
Reinfeldt unveiled the proposed youth employment package last summer in a bid to combat the stubbornly high employment rate among young Swedes.
The centerpiece of the proposal involved allowing people younger than 25 to combine work and studies immediately following completion of their secondary education (gymnasiet).
Young workers could work at 75 percent and receive a 75 percent salary while spending the rest of their working week studying or enrolled in vocational training programmes.
Other aspects of the proposal, which Reinfeldt hoped would create 30,000 jobs, included a reduction in social fees paid by employers for entry-level jobs as well as a review of fees paid for unemployment insurance (a-kassa).
The youth jobs package was to be forged together with buy-in from labour unions and employer associations and negotiations have intensified in recent weeks in hopes that the government would be able to present a more concrete proposal later this spring.
Confederation of Swedish Industry vice chairman Christer Ågren accused unions of being "irresponsible" in attempts to broaden negotiations to include issues unrelated to youth unemployment.
"If LO is interested in helping young people get jobs they should focus on that and not try to win political advantage in other areas," he told TT.
Among other things, union negotiators wanted to discuss pensions and labour law, according to Ågren.
He added that employers groups would be willing to get back to the negotiating table if unions dropped demands to stop changes to Swedish labour law and the scrapping of a government enquiry into grounds for layoffs for personal reasons.
"We can only hope that LO comes to its senses so we can go ahead with the question at hand. The jobs package is a good idea, but it's tragic that LO is using it as an excuse to push through other changes unrelated to the issue," he said.