The £80 million scheme, a joint venture between Cala and AWG, would have seen an eight-storey office block on top of a new underground banqueting and events space for the Edinburgh International Conference Centre.

The shelving of the scheme is expected to have a major impact on Edinburgh's ability to attract major conferences and events.

However, the council and the EICC said they would be working to try to rescue the scheme by trying to get other developers involved.

Work had been due to get under way within months on the project – which has been more than five years in the planning stages – after it received planning permission last August.

More than 1500 jobs were expected to be created on completion of the scheme next year.

However, the developers have said the project is no longer viable because of spiralling construction industry costs.

The joint venture firm had struck a deal with the city council and the EICC to develop the car park site off Morrison Street.

The project – drawn up by Edinburgh's "design tsar" Sir Terry Farrell – was to plug one of the last sites in the city's original Exchange business area. The underground extension was planned to host major exhibitions, banquets or 1600-seater event and was seen as key to Edinburgh's ability to compete with other cities around the world to host major conferences and events.

A spokesman for the joint venture said they were "unable to progress" the development because construction costs were much higher than anticipated.

He added: "We've worked hard on this project for four years and have made a significant investment in taking the project to such an advanced stage.

"However, construction costs have risen significantly at a global level and it is bitterly disappointing that this situation has arisen, which could not have been predicted at the time of our selection."

A striking new atrium building was to act as a new entrance for both the existing EICC and the extension. Several retail units were to be provided on the ground-floor of the office complex, which was to be set back from a landscaped public area.

The underground area was planned to feature a computer-controlled floor capable of transforming the space from a flat-floored exhibition or banqueting hall to a tiered auditorium at the touch of a button.

EICC chief executive Hans Rissmann said: "We regret the prospect of losing momentum of our original development schedule, but our focus now is on resuming the process as quickly as we can within European Union procurement rules.

"Our first client, who was scheduled for the new space in 2009, the Nato Parliamentary Assembly, has already confirmed they will still be coming to Edinburgh and the EICC."

Andrew Holmes, director of city development for the council said: "We've been advised that Cala-AWG are no longer able to progress this development, which is particularly disappointing from our point of view as this development would give the EICC a unique expansion space and enable the city to compete for more world-class conferences and events.

"We will now work closely with EICC on the best means of delivering this major project, the last development within the Exchange."