The Millennium Stadium was central to Cardiff's bid

Culture Minister Tessa Jowell announced that Liverpool was the winner at 0810 BST on Wednesday before travelling to the city for lunchtime celebrations.

Liverpool shocked favourite Newcastle-Gateshead to win the title.

Some estimate that winning the title could be worth �1bn in added investment and increased tourism.

Liverpool will now become the first British European Capital of Culture since Glasgow in 1990.

There was disappointment in Cardiff after the announcement.

Liverpool was the surprise winner

But leaders of the city's bid pledged that many of the projects planned for Cardiff would continue, ahead of the city's centenary in 2005.

Lynne Williams, chief executive of Cardiff 2008, said: "Yes I'm disappointed, but we do have this legacy for 2005.

"Newcastle-Gateshead must be feeling terribly disappointed but we have this programme in place for 2005.

"I was absolutely gobsmacked - we were so convinced it would be Cardiff or Newcastle-Gateshead."

Leader of Cardiff council, Russell Goodway, added: "I'm disappointed, but delighted for Liverpool, because the benefits for them will be tremendous.

"But for Cardiff, not winning the title is not an excuse for us to stop doing what we've been doing for the last two years."

Initially, 12 cities were contesting the title, before the shortlist of six was announced in October 2002.

The other contenders on the shortlist were Birmingham, Bristol, Newcastle/Gateshead and Oxford. Many of those backing the Cardiff bid said the bidding process had brought long-term benefits to the city.

'Development'

Olympic athlete Tanni Grey-Thompson said: "For the people on the Cardiff 2008 campaign, it's disappointing.

"Winning the title would have been nice, but it's not that important to the development of Cardiff."

Welsh Assembly Culture Minister Alun Pugh said: "The announcement in no way detracts from the level of cultural recognition brought to Cardiff and the rest of Wales by being part of this competition.

"The opportunities of being involved in the bidding process have been far-reaching and have helped Wales and its capital city gain international recognition."

Welsh Secretary Peter Hain added: "Cardiff has its Millennium Stadium, National Museum, the Cardiff International Arena, and its Millennium Centre on the way.

"It is an exciting, multicultural and multilingual European centre.

Announcing Liverpool's victory, Tessa Jowell said any of the bidding cities could have emerged victorious.

She said: "It's been a fantastic competition.

"All the bids were of the highest standard and any of the cities could be the nomination for 2008."