The Cabinet Office has revealed it is to abandon the second phase of the Scope IT project at a cost of £24.4m.
The project was designed to improve collaboration between the UK's various security and intelligence agencies.
A spokesman said the Cabinet Office terminated a failing project after legal and technical advice, but the decision was not taken lightly.
"We take this issue very seriously and very aware of the loss of public funds especially at this time," he said.
Jenny Willott, Liberal Democrat Shadow Cabinet Office Minister, said the decision is particularly worrying because of the nature of the Scope programme.
"It is essential that security and intelligence agencies and government departments have effective systems for close collaboration," she said in a statement.
The Cabinet Office is responsible for co-ordinating IT across Government and if they abandon major projects, this does not bode well for other departments, she said.
According to Jenny Willott, the Cabinet Office took the decision as early as July last year.