Walsh, whose contract was to come to an end tomorrow, had already submitted his resignation last month after his demands for a greater say in team decisions and hand-picked support staff were turned down by HI and SAI.
He had been negotiating to stay on board and met Sports Minister Sarbananda Sonowal this morning but the talks ended inconclusively, prompting the 60-year-old to head back to Australia without withdrawing his resignation.
Walsh, who was present at a press conference, said that he was still optimistic about coaching the Indian team and that the fresh proposal would address all his demands.
Walsh's continuance had become doubtful after reports emerged that he had developed serious differences with Hockey India President Narinder Batra.
Batra had alleged that Walsh had indulged in "financial fraud" during his stint with USA Hockey and he was reluctant to keep the Australian on board.
Before this, the team won a silver medal in the Commonwealth Games and most recently defeated world champions Australia in an away Test series.
Earlier, a three-member panel had been formed to look into Walsh's demands but it failed to come to any "conclusion".
The panel comprising former hockey captains Ajit Pal Singh, Ashok Kumar and Zafar Iqbal met Walsh, Hockey India Performance Director Roelant Oltmans and Sports Authority of India officials twice but could not come up with a solution to end the logjam.
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