A study found "no strategic case" for the Severn barrage project, said energy secretary Chris Huhne, who gave the green light for building eight nuclear plants in the same announcement.
"The study clearly shows that there is no strategic case at this time for public funding of a scheme to generate energy in the Severn estuary," said Huhne. "Other low carbon options represent a better deal for taxpayers and consumers."
Although the feasibility report described the project as "high risk" and unlikely to attract private investment, energy trade association RenewableUK said the decision to ditch the tidal scheme was "disappointing."
"It would be a disappointing decision to abandon the Severn Barrage project," said Charles Anglin, spokesperson for RenewableUK.
"The barrage project is not just a single building across the Severn. It involves reefs, lagoons and smaller barrages. This project alone could supply almost 5 percent of the UK's electricity consumption. It is important that we get the associated costs in perspective. The £15 billion [the feasibility study put the figure at up to £34 billion] of the barrage is equivalent to building three new nuclear power stations but instead of lasting 40 years it would last 120 years."
The Severn barrage was intended to harness energy from the Severn Estuary, on the west coast of the British mainland, which has the world's second-highest tidal range of 12.8 meters.
Peter Hain, the opposition's spokesman for Wales, said dropping the barrage spelled "a terrible day for Wales."
"This is a decision that is equally disastrous for the Welsh economy and our environment," he said.
CBI, an organization representing British business, described the decision as "understandable" in light of the poor state of public finances. But, while welcoming investment in nuclear, CBI director of business environment Dr Neil Bentley called for development of tidal resources.
"The Government should continue to encourage innovation in tidal power to reduce the cost of this technology," he said.
The barrage's hydro-electric dam would have generated electricity from water filled by the tide rather than a flowing river. But the scheme, among five hydropower projects shortlisted for the Severn estuary, was opposed for its impact on wildlife by Friends of the Earth (FOE) and the Royal Society for the Protection of Birds.
The feasibility study found that the barrage would destroy rare habitats and threaten some fish and bird species while also raising the risk of floods.
FOE Cymru welcomed Huhne's decision while offering support for alternative approaches to reaping the Severn's tidal power.
"The Severn estuary is an extremely important source of renewable energy that ought to be harnessed as soon as possible," said FOE Cymru director Gordon James.
"We believe this could be done by other less damaging technologies, such as tidal lagoons, tidal reefs and a shoots barrage, and we hope the government will pursue these better options urgently."
Huhne's announcement also left open the possibility of funding for alternative tidal schemes in the Severn.
"With a rich natural marine energy resource, world leading tidal energy companies and universities, and the creation of the innovative Wave Hub facility, the area can play a key role in supporting the UK's renewable energy future," he said.
By revealing eight potential sites for nuclear plants by 2025 in the same announcement Huhne further dismayed some elements of the UK's green lobby.
Before taking office the minister was widely seen as hostile to nuclear power and several members of the Liberal Democrat Party, a minority partner in the UK's coalition government, are likely to abstain from votes on new nuclear plants.
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