The £83 million plan to rebuild the Isle of Wight College has been axed, even though £2.5 million has already been spent on plans.
The Learning and Skills Council has told the college it has not won any of the cash it needed to press on with a grand design sixth form and new campus.
The LSC approved only 13 of 180 projects throughout the country, many of which were much more advanced than the Island college, where at least demolition work had not started.
The college had already been working up alternatives in the knowledge that grant money was tight.
It said there was "huge disappointment" but was determined to press ahead with less ambitious plans to knock down old buildings and create facilities to offer a full range of A-level courses for up to 500 sixth formers.
"It is disappointing for the college, and for the Island, but we remain committed to working with it to create the new sixth-form facilities," said Isle of Wight Council leader Cllr David Pugh, who also has responsibility for education.
The college has already spent £2.5 million on first drawing up plans for a new college 16 months ago and then scaling them back through the credit crunch after being warned by the LSC that money was drying up.
Having been encouraged by the LSC to come up with a scheme, it now plans to "vigorously" pursue the LSC for the £2.5 million back.
"But, if we are unsuccessful in getting the money from the LSC, it will not impact seriously on the college’s financial position and certainly not on jobs or the breadth of courses we offer. I am 100 per cent certain of that," said assistant principal Peter Thompson.
"It is a huge disappointment for the college, for the students and for the whole of the Island, not just because of the size and importance of the scheme but for the educational future of the Island.
"We have been working on alternative plans, which we will fund ourselves, to knock down much of the outdated buildings and create comprehensive, new, sixth-form facilities — albeit scaled-down — in 2010. We have been busy working up plans B, C, D and E.
"Now plan A has been turned down I doubt public finances will allow it to resurface for the foreseeable future."
Reporter: richardw@iwcpmail.co.uk