The government has decided to pull the £50 million set aside for the regeneration of Old Street's Silicon Roundabout in East London.
Following an interview with TechWorld in March, it was thought that the money was being held until City Hall submitted appropriate regeneration plans, but it has now been made clear that the money is no longer available.
"Given that a permanent solution for the roundabout will be technically difficult and some way off that money has gone back into general expenditure," a spokesman for the Treasury said.
"It is normal practice for any money that hasn't been spent to return to the Treasury to help reduce the deficit."
Plans were in place to give the area a much-needed makeover, including the construction of a hi-tech institute at Old Street roundabout.
Earlier this year, Prime Minister David Cameron said, "We're investing in creating the largest civic space in Europe - a place for startup companies and the local community to come together and become the next generation of entrepreneurs."
The new building was set to include a 400-seater auditorium with high-speed T4 broadband with the aim of supporting 200 startups and helping more than 1,000 young people find skilled employment each year.
Mayor of London Boris Johnson said the regenerated area would provide a "vital resource to nurture upcoming technology and creative superstars from around the world, while driving huge investment into the capital and helping to create thousands of jobs."
While many of these plans have now been put on hold, several improvement schemes are still scheduled to go ahead. Transport for London is set to start work on environmental improvements to Old Street roundabout and tube station shortly.