Gordon Brown's eco-towns project suffered another setback yesterday, after Tesco pulled the plug on one of the most high-profile projects.

The supermarket chain withdrew its proposed development at Hanley Grange, near Cambridge, from the government scheme to approve new eco-towns, issuing a statement that acknowledged widespread local opposition.

Tesco said the eco-town had been a "strong proposal" that had had "very good prospects" of winning government support. But it noted pointedly that a development of this type "stands the best chance of being delivered successfully if a broad range of stakeholders in the region feel they have been fully engaged in the process leading up to a decision".

The supermarket chain said it would instead be pursuing plans to develop the site through the government's Regional Spatial Strategy - its regional planning guidelines.

The 12,000-home scheme had already been hit by the withdrawal of one of the relevant landowners, the Wellcome Trust charity, last month, reducing by a third the land that was available.

Tesco's decision is another blow for Mr Brown's flagship proposal to build the first new towns for 40 years. The principle of addressing the UK's housing shortages by building communities to the highest environmental standards initially commanded broad support.

But the proposals for the towns have run into intense opposition from local communities, while the government's handling of the process has come under fire from opposition parties.

Ministers recently delayed the publication of the shortlist of "up to 10" eco-towns from October to early next year, saying more time was needed to consider the submissions.

Yesterday's announcement means the list of 16 applicants announced in April is down to 12.

The Conservatives accused ministers of "arrogantly ploughing ahead with flawed proposals, which have been rejected by green pressure groups, residents and now the developers themselves". Grant Shapps, shadow housing minister, said Tesco's move showed that "even those who are behind the applications have decided that it is better to go it alone and forget the government sponsored eco-con scheme".

However, the Department for Communities and Local Government said that the "whole point of developing a long list of potential locations was to get down to a shorter final list, and we remain committed to announcing this final shortlist of up to 10 potential locations early in the new year.

"There remains a serious shortage of housing in the Cambridge area . . . and this is an issue that must be resolved.

"We have been clear that only proposals of the highest standards stand a chance of becoming an eco-town. The promoters have decided they need more time to develop their proposal."