Mitsubishi was due to begin sales of the LPG Outlander on January 2 for a £1,000 premium over the petrol model.
Its UK importer, Colt Car Company, had applied for a block grant and charged a flat £1,000 more than the standard car, saving customers the additional paperwork of applying themselves.
However, the Energy Saving Trust, which runs the PowerShift programme, announced that no more LPG grants would be allocated until the next financial year in April 2004.
Mitsubishi sales and marketing director Lance Bradley, said: 'It's disgusting. The Government keeps on at the car industry about emissions, then this happens.'