Europe's proposed satellite-navigation system, Galileo, will need more public funds if it is to be built.
Galileo's companies have been unable to agree a way forward
Hope is receding that a private consortium asked to run the system can end its infighting and meet a 10 May deadline to move the project forward.
This is likely to mean European taxpayers stepping in to cover costs.
German Transport Minister Wolfgang Tiefensee, speaking on behalf of the EU, said: "Galileo is going through a deep and grave crisis."
He added: "We're in a dead end street. The cardinal problem is that the companies still have not been able to agree on the way forward. We need to find an alternative solution."
The consortium comprises leading aerospace and telecom concerns: EADS, Thales, Inmarsat, Alcatel-Lucent, Finmeccanica, AENA, Hispasat, and TeleOp.
The European Commission (EC) set the May deadline for them to come forward with a single company structure to run Galileo, a chief executive and common negotiating position.
But with little sign of the target being met to the Commission's satisfaction, the EC is now expected to present new proposals to overhaul the project on 16 May.
"Our view is that the current scenario to put Galileo into place cannot work," said Michele Cercone, spokesman for the EC's directorate general for transport.
Galileo's planned network of 30 satellites will beam radio signals to receiving devices on the ground, helping users pinpoint their locations.
The system's technologies are designed to bring greater accuracy and reliability to navigation and timing signals delivered from space.
The intention behind Galileo was that taxpayers in the EU would inject more than one billion euros (£0.7bn) into the early development of the project.
GALILEO UNDER CONSTRUCTION
A European Commission and European Space Agency project
30 satellites to be launched in batches by end of 2011-12
Will work alongside US GPS and Russian Glonass systems
Promises real-time positioning down to less than a metre
Guaranteed under all but most extreme circumstances
Suitable for safety-critical roles where lives depend on service
The deployment phase - the launch of the satellites and the construction of ground stations - was expected to cost at least two billion more, with two-thirds of the investment being borne by the private sector.
The latter was also expected to pick up all the running costs in the long term.
The first demonstrator spacecraft, Giove-A, is already in orbit. A second, Giove-B, which has had some technical problems, should be in orbit by the year's end.
The contract for the first four satellites proper in the final constellation was awarded at the end of 2004, but the time has now come to order the remaining 26.
It should be the private concession making the spacecraft order - but with no progress on its formal establishment, it seems certain that European taxpayers will now have to shoulder a greater burden of the construction costs if Galileo is to stay on track.
"There will be a stronger participation of the public sector in the construction phase of Galileo," said Mr Tiefensee, adding that the future of the system would be decided at an EU transport ministers meeting in June in Brussels.
Originally, Galileo was to have started launching its 30 satellites by 2008. However, that date was postponed to 2011/12 due to previous disagreements between EU governments on how to pay for the system.
Satellite navigation systems determine a position by measuring the distances to a number of known locations - the Galileo satellites
The distance to one satellite defines a sphere of possible solutions; the distances to four satellites defines a single, common area
The accuracy of the distance measurements determines how small the common area is and thus the accuracy of the final location
In practice, a receiver captures atomic-clock time signals sent from the satellites and converts them into the respective distances
The whole system is monitored from the ground to ensure satellite clocks do not drift and give out misleading timings