SAN JOSE, Costa Rica - Honduras's de facto government has shot down a last-gasp deal to resolve the country's political crisis, insisting ousted President Manuel Zelaya cannot return to office.

The return of Mr Zelaya as president was impossible, interim foreign minister Carlos Lopez Contreras said on CNN's Spanish station, effectively killing hopes of a settlement.

Crisis mediator and Costa Rican President Oscar Arias has proposed a fresh plan for Zelaya's return Wednesday, with concessions for the interim government, which backed the army's June 28 expulsion of the Honduran leader.

Arias's plan called for Zelaya's return to the country as president in a national unity government, until his term ended in January.

In return, the current de facto leadership would see sanctions against the country lifted, a limited amnesty for political crimes and a bar on Zelaya seeking constitutional reforms designed to let him seek another term in office.

But negotiators for the de facto government returned to Honduras saying the deal presented in Costa Rica would not be signed by their leader Roberto Micheletti.

"As I see it, it will be difficult for him to sign up," spokesman Mauricio Villeda said.

Zelaya meanwhile told Venezuela's Telesur channel that the crisis mediation "had practically failed." The interim leaders had "decided to deny all possibility of an agreement," he added.

Arias, who won a Nobel Peace Prize for his work as a mediator in the region, earlier suggested that if both sides failed to agree, they turn to international bodies, such as the Organization of American States (OAS).

They should seek a solution there "to the worst crisis in almost three decades of the young Honduran democracy," he said.

A frustrated Arias said Honduras had turned into the North Korea or Albania of Central America.

Zelaya, exiled in neighboring Nicaragua, has said he will return "by air, land or sea."

But despite increasing international isolation, the interim leaders have maintained that Zelaya will be arrested if he attempts to return to the country.

Hondurans remain deeply split over the possibility of his return. Many fear it would provoke more violence after Zelaya's spectacular first attempt left at least one protester dead in clashes with soldiers.

On that occasion, troops had blocked the runway of the airport where he tried to land.

Hundreds of white-clad demonstrators on Wednesday protested against Zelaya's return in the capital, where the situation has become increasingly polarized.

"We don't like you, Mel," one banner read in Wednesday's demonstration, using Zelaya's nickname.

Zelaya's supporters meanwhile have announced their own demonstrations.

The European Commission's Relations Commissioner Benita Ferrero-Waldner called on both sides to defuse the crisis.

"Everything must be done so there is a peaceful solution, not a military confrontation," she said during a trip to Mexico.

This week, the European Union this week increased its pressure on the new regime, suspending 65.5 million euros (93 million dollars) in aid to Honduran institutions as part of the international aid freeze.