The correct answer is D. Walter said that he could not do it now.
The sentence “Walter said, ‘I cannot do it now'” is in the past tense. This means that Walter said this at some point in the past, and he is no longer saying it now. The other options are all in the present tense, which would mean that Walter is still saying these things.
Option A is incorrect because it uses the present tense. Walter is not saying that he cannot do it now, he said that he could not do it now.
Option B is incorrect because it uses the past tense, but it says that Walter is saying that he cannot do it then. Walter is not saying that he cannot do it then, he said that he could not do it now.
Option C is incorrect because it uses the past tense, but it says that Walter could not do it then. Walter could not do it now, not then.