Tasmania's marathon native forest peace talks have collapsed, with green groups groups and industry unable to bridge a divide over the trees to be logged or protected.

The two year long state and federal government sponsored peace process has ended with environmentalists set to resume the state's forest wars, and the industry likely to lose millions in compensation.

Prime Minister Julia Gillard last year offered a $276 million industry assistance package that would have ended logging of most native forests and meant World Heritage nomination for some,  if the two sides could make a final deal.

The failure of the talks to reach this agreement was confirmed by the Australian Conservation Foundation, The Wilderness Society and Environment Tasmania in a joint statement.

"Negotiations responding to the crisis in the native forest logging industry today collapsed due to the unwillingness of Forest Industry Association of Tasmania and the old growth sawmilling sector to move itself onto a sustainable footing and no longer log World Heritage-verified forests," the groups said.

Federal Environment Minister Tony Burke said his "honest judgement" was that the signatories to the peace deal would not reach a final agreement.

"Now people have to look down the barrel of being without an agreement," he said. "Let market forces run their course without a higher level of support than was on the table."

Tasmanian deputy premier Bryan Green said the two governments saw no prospect of a fundamental shift in the two sides' thinking.

"We understand each side's argument," Mr Green said.  "There's no way we can shoehorn them into an agreement. That is never what it's been about."

Of an original 572,000 ha. claim, the conservation groups are understood to have reduced their bid to around 475,000 ha.

But they refused to compromise on high conservation value old growth forests, some of them bordering the existing World Heritage Area.

A demand by the timber industry to keep access to 160,000  cubic metres of sawlog annually is understood to have been reduced to about 120,000 cubic metres.

Green groups say the break point came when the industry refused to allow sawlog quota to be retired, but instead wanted it redistributed.

"This is incredibly disappointing and incredibly frustrating," said  Wilderness Society negotiator Vica Bayley.  "There was an agreement there for the taking."

The groups foreshadowed a return to the highly divisive campaign to change Tasmanian native timber markets.

The Australian Forests Products Association said it was disappointed opposing sides did not reach an agreement, but was unable to comment on the final breakdown.

"At the end of the day AFPA is about a viable and continuing forest industry in Tasmania," chief executive David Pollard said.

Comment was being sought from other industry groups.