Negotiations over how to resolve Abu Dhabi's US$6.5 billion claim against 1MDB have broken down, The Wall Street Journal reported.

The report said Abu Dhabi and Malaysia nearly reached a deal last December in which Putrajaya would need to fork out a US$1.2 billion payment as a first step to the dispute resolution.

"But Malaysia pulled out because advisers to the prime minister were dissatisfied with the agreement," said the report, citing people familiar with the matter.

The dispute is now expected to go for international arbitration, it said.

According to the US Department of Justice, around US$3.5 billion of 1MDB funds, including those intended for Abu Dhabi's International Petroleum Investment Company's subsidiary Aabar Investments PJS, was diverted to several individuals including billionaire Low Taek Jho, better known as Jho Low...