“The price expectations are too far apart,” the person told Reuters on Thursday.
While the project had not yet failed its prospects are now close to zero, the source said.
Meanwhile, talks with the racing teams Sauber and Williams are continuing, the person said.
Both Audi and VW Group declined to comment.
Manager Magazin reported earlier on Thursday that talks with McLaren were close to failing after months of negotiations.
VW Group has not previously been involved in Formula One but has worked with Red Bull, notably in the world rally championship.
On Monday, VW Group CEO Herbert Diess said that Audi and Porsche would join Formula One, after convincing the group that the move would bring in more money than it would cost.
“According to both premium brands, Formula One is the most important lever to boost brand value,” Diess said. “With the plans for a bigger presence in China and the U.S., the attraction as the biggest motor-racing spectacle is only going to grow.”
Both Porsche and Audi have started work on F1 engines, Diess said.
A source had told Reuters in March that Audi was ready to offer around 500 million euros ($556.3 million) for McLaren as a means to enter.
Porsche intends to establish a partnership with F1 racing team Red Bull starting in 2026.
Bloomberg contributed to this report