Lancaster City Council has scrapped support for a "digital village pump" pilot project that would have provided at least seven remote Lancashire villages with fibre to the home (FTTH) for £92 a year.
Villagers now have to hope that a £40m match-funded county council project will prioritise their area and provide the same performance of the original.
At least two of the villages affected have received notice that their existing service will terminate on 13 February unless they sign up with a joint-venture supplier owned by BT and Lancashire County Council.
An update to the council's forward plan for February to May revealed the council had withdrawn a bid for £750,000 from the Rural Development Programme for England (RDPE) for the pilot.
Chris Conder, an advocate for FTTH in rural areas and manager of a mesh wireless community broadband network, said: "This project would have cost the council nothing. It was RDPE funding."
She said the plan meant that any area it passes could have a fibre connection for around £92 a year. "But there is no way we can do it for [all of] Lancashire until we have had a go at it," she said.
Chris Conder said RDPE money was earmarked for innovation solutions. "Nobody in this country has attempted to build a self-sustaining rural fibre network on this scale as a prototype. This is a great opportunity missed," she said.
"The city council worked with many grassroots broadband people and organisations. The parish councils were also involved and a superb project was designed. The failure of it to get through the process of funding is a failure of 'Big Society'. The people at the top didn't listen to the people at the bottom. All that work was in vain."
According to a council report on the project, the funding would have provided next generation access (NGA) speed broadband to homes and businesses in Abbeystead (via Quernmore), Arkholme, Melling, Wennington, Wray and Caton.
The network would use new fibre-optic lines from existing internet exchanges to central points in rural villages and then, if practical, fibre to individual premises, it said.
The reported noted the communities themselves were prepared to dig the trenches for the ducts to lay the fibre. This would "enable the infrastructure costs to be lowered below standard telecom provider costs (which would render the project too expensive)", the report said.
"These communities have been identified as actively working towards NGA and have an immediate need for appropriate backhaul. However, they are some way off the existing core network and need to be reached by new network build," it said.
"The city council bid has been in development for some time and has incorporated successful partnership working with input and support from representatives of the rural communities involved. As such, expectations have been raised and it is important that, whichever project is eventually implemented, that local communities remain informed and feel ownership of the initiative."
The report noted that Lancashire County Council had applied to the North-west Regional Development Agency for concept approval for £20m funding towards a county-wide rural NGA project. It estimated £35m was needed, which meant match funding would be needed.
"The proposal will require the county council to appoint a commercial partner to facilitate delivery and bring additional investment to the table," it said. If all went well using the EU's funding and competitive dialogue procedures, the project could start in early 2012, it said.
The report said there was little available information on the county proposal. "The competitive dialogue tender route dictates that much of the specification and delivery route developed to provide a solution to the rural broadband problem is formulated during the progression of the tender process itself by discussion with the competing bidders," it said.
A similar process used by Cornwall to buy its £132m NGA project resulted in only one bid, from BT.