Plans for the scheme were altered to include apartments

The scheme's public partners said costs rising to �324m from �228m and "fundamental changes" to the original waterfront plan left it unworkable.

Earlier it was announced the grace - known as The Cloud - would include apartments to help finance it.

On Monday concern was raised that because of the changes the scheme would be subject to a lengthy public inquiry.

And there were fears that because "the scheme's character has changed fundamentally" it might be called in for extra scrutiny by Deputy Prime Minister John Prescott, leading to a costly delay.

Project partners - Liverpool Vision, North West Development Agency, Liverpool City Council and National Museums Liverpool - said at a meeting the additional risks created by changing the plans had become "unacceptably high".

The city remains committed to delivering our aspiration for a sustainable and deliverable cultural and leisure development David Henshaw, Liverpool City Council

"I am disappointed that we are not able to take this scheme any further," said Sir Joe Dwyer, chair of Liverpool Vision.

"I firmly believe that we were right to consider a highly ambitious building which would have added a new dimension to our outstanding waterfront."

Plans ran in to difficulty when additional residential towers proposed to be built alongside The Cloud had height restrictions imposed on them.

David Henshaw, city council chief executive, said: "The public sector partners have been determined to ensure that the Fourth Grace would not be a Millennium Dome, with spiralling costs which would have represented an unacceptable drain on the public purse.

"However, the city remains committed to delivering our aspiration for a sustainable and deliverable cultural and leisure development on this important site."

The partners will now review options available for the site, which could include a museum, theatre, public open spaces and a canal link.