This issue did not exist in Parallels 3. Parallels 4's keyboard management is a huge step backwards from Parallels 3. Not to mention Parallels 4's performance is far worse than its predecessor, and the sticky keys bug is something they knowingly released with, even though it's what most people consider to be a critical bug. They feigned ignorance at first, but there's no way that bug made it through QA because it happens very quickly in any given session.

Disabling Mac OS X system shortcuts is not a solution because that means you cannot use Spaces keyboard shortcuts, which basically means if you're running Parallels 4 on a MacBook Pro, you're stuck in Windows land with no easy way to get out. And CTRL+W does not work in Parallels when OS X shortcuts are disabled.

Parallels Desktop is an OS X application, your virtual machine running in Parallels is just another application window for OS X, even when it runs in full screen mode. Hence, by default, when you press Cmd-W, OS X thinks you want to close the currently active window, which happens to be your Windows virtual machine.

If you will go to the Parallel's preferences, to Keyboard & Mouse and will uncheck the option called "Enable Mac OS X system shortcuts" you will get the behavior that you want — Cmd-W will not close the virtual machine anymore.

Also in Windows the shortcut that you want is actually Ctrl-W, since Windows doesn't know about Mac-only Command key at all. And Ctrl-W works as expected in Parallels even when OS X shortcuts are set to have higher priority.

Vmware's worth the extra couple of bucks; using it with a dual monitor sets up, I forget it's a virtual machine…

I never said it automatically closed the VM, by the way. CMD+W brings up the dialog asking if you want to close it. In other words, CMD+W does not get passed to Windows, Parallels desktop captures the shortcut and asks you if you want to shut down your virtual machine. The expected behavior is your window in Windows gets closed.

With Parallels as your active program, go to "Parallels Desktop" in the menu bar, then choose "Preferences". In the window that opens choose "Keyboard & Mouse" from the left-hand menu and then just uncheck the box next to "Cmd+W" under the list for "Virtual Machine Shortcuts".

Now if you hit CMD+W when Parallels is active, it'll pop up a notification window asking you what you'd like to do with your VM instead of automatically closing it.

I agree, should not have been set as the default, but an easy work-around.