The move marks the end of the biggest police reform for 40 years, which was intended to address concerns that smaller forces could not cope with counter-terrorism and high-profile investigations, such as the Soham murders.

Tony McNulty, the Police Minister, yesterday called in the chief constables of Cumbria and Lancashire, who were keen to merge, and told them that there was no money for the switch.

Ken Jones, the president of the Association of Chief Police Officers, then told every chief constable: “The necessary financial support has not materialised and mergers, including voluntary ones, will not take place”.

When the merger scheme was announced, Charles Clarke offered £125 million to pay for it, later promising up to £1 billion. Mr Reid’s decision to scrap the scheme will be seen as a rebuff to his predecessor and is certain to increase tensions between the two. A Home Office source said last night that Mr Clarke had made plain that he wanted the mergers “come Hell or high water”. Mr Reid intended to deal with the issue “in a measured way”.

Officials said that the talks with chief constables had thrown up issues that could not be resolved and Mr Reid would make clear that no mergers were likely to go ahead in the foreseeable future. He seems to have decided to spend the money on other priorities.

The proposals had been put forward last autumn to create “strategic forces” from the existing 43, but they divided chief constables and were opposed by local politicians.

There were concerns about the cost of IT, redundancies and pensions, and fears that the bills would fall on forces whose spending is already capped. One report said that at least 25,000 police jobs would be lost.

Cumbria and Lancashire were the first to choose to amalgamate but there was concern about harmonising the council tax precept of the two counttes. There were also worries about start-up costs. The forces put these at £23 million, but the Home Office offered £17 million. Yesterday Mr McNulty met the two chief constables and the chairman of the police authorities, but he had little to offer. The Home Office said afterwards: “He explained to them it has not been possible to resolve issues surrounding the mergers, and so they don’t wish to proceed.”

A ministry spokesman said “What happened today was about Cumbria and Lancashire and we are not going to talk about the bigger issues. There may well be a statement further forward on this.”

The two forces’ representatives expressed “intense disappointment” and Malcolm Doherty, chair of Lancashire Police Authority, said: "We feel badly let down. We have done everything in our power to get this merger to work.”

Mr Reid told MPs last month that he had postponed decisions on the mergers until the autumn, but that the plan was still alive.

The merger plans were proposed after a report by Denis O’Connor, an inspector of constabulary and former chief constable, attacked the structure of forces as unsuitable for the demands of the 21st Century. He said that many smaller forces were simply “not fit for purpose” and suggested that forces should be at least 4,000 strong. That, he said, was the minimum required to cope with serious and organised crime, counter-terrorism, disasters, critical incidents, public order and roads policing.

The idea was to create large regional forces in areas such as the North-East and Wales, and plans for most of the country have been announced.

Mr Clarke had hoped to start appointing chief constables this spring, but he faced rising opposition. Police authorities said that local communities had not been properly consulted and some were taking High Court action to halt the mergers.

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