The private consortium asked to run Europe's satellite navigation system, Galileo, has missed a key EU deadline for moving the project forward.
The Galileo spacecraft would be launched in batches
The European Commission (EC) said the companies had made "insufficient progress", resulting in unacceptable delays and risks for public finances.
This is likely to mean European taxpayers stepping in to cover an advance payment for construction costs.
The EC is expected to present new plans to overhaul the project on 16 May.
These will be sent for approval by the EU's transport ministers in June.
The consortium comprises leading aerospace and telecom concerns: EADS, Thales, Inmarsat, Alcatel-Lucent, Finmeccanica, AENA, Hispasat, and TeleOp.
The Commission set a 10 May deadline for them to come forward with a single company structure to run Galileo, a chief executive and common position from which to negotiate with EU representatives over the future of the project.
On Thursday, the Commission announced that the target had not been met to its satisfaction.
A different scenario
Michele Cercone, spokesman for the EC's directorate general for transport, said the Commission now intended to propose "different scenarios to put Galileo on the right track again".
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 original 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 this 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.
'Value for money'
Mr Cercone said this option would be better for Europe's taxpayers in the long run. He likened the alternative options to the difference between leasing a car and buying one.
"When you lease a car you pay less at the start, but it turns out more expensive in the end. When you buy a car for cash, you have to come up with the money sooner, but overall the car will cost less," he told a press briefing in Brussels.
"If you apply this example to Galileo, it is less expensive to take on the entire construction of the infrastructure than it would be to guarantee for 100% a private loan at market value, as is the plan of the consortium."
Under consortium proposals, public money would be used to guarantee the risks and debts of the project. But Mr Cercone said using public money to cover construction costs offered the best value for money and would protect taxpayers.
Galileo was supposed 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.