The £30m Institute of Web Science (IOWS), which was announced in March this year, has been dumped in a bid to slash public spending costs.
However, the Business, Innovation and Skills (BIS) department, which was funding the project, revealed it could not afford to create and develop the institute in the current economic climate.
BIS said it remained committed to investing in internet technology research.
"The research councils are investing £117m in a Digital Economy Program to help drive research in this area and more than £30m is being invested specific projects relating to the semantic web," BIS told ZDnet.
Professor Nigel Shadbolt told the BBC the team was "obviously disappointed".
"However, we do understand that immediate decisions had to be made about what not to start, pending a wider review of priorities in the Spending Review and the development of a fuller business case."
The move is part of Chancellor George Osbourne's plan to cut £6.2bn of public spending, which also saw the British Education Communications Technology Agency (Becta), which handles technology in UK schools, scrapped.