By Julia Houston
BBC News Online, North West
Just over a year ago, Liverpool beat off fierce competition from five UK cities to win European Capital of Culture status for 2008.
The Sage Gateshead is due to open this Winter
But the ambitious development at the heart of its bid, Will Alsop's Cloud design for a so-called "Fourth Grace" on the waterfront was dropped last week after costs rose more than £100m over budget.
The project was central to the regeneration of the area, transforming the docklands into a showcase for what the city had to offer.
Now councillors are planning an inquiry into what went wrong - and how they can prepare a new attraction for the prime site.
The situation is perhaps all the more irksome for Liverpool because of the apparent success of Newcastle-Gateshead - one of its main rivals for the culture capital prize.
Tipped to win the title from the very beginning, the North East city's bid seemed stronger than others including Birmingham, Cardiff, Bristol and Oxford.
But even without the title, regeneration in the region is booming.
"We always knew what our strategy was," said Neil Rami, Chief Executive of the Newcastle Gateshead Initiative (NGI).
"We planned to establish a centre for culture each year between 2000 and 2008, that was part and parcel of the bid.
"Everything we said we were going to do is already done, or is well on the way to being completed."
Instead of sulking over losing out on the culture capital status, the NGI launched a 10-year strategy, called Culture 10.
Projects backed by Culture 10 include the Sage Gateshead, a £70m glass-tiled music centre designed by Norman Foster; a £10m plan to restore Saltwell Park; and the Centre for Children's Books, to be the first of its kind in the UK.
So how has Newcastle-Gateshead managed to succeed when Liverpool appears to be lagging behind?
Liverpool City Council said since an investigation into the failed project was opened on Tuesday, it would be "inappropriate to comment".
But a spokesman denies The Cloud was central to the city's bid.
He insisted: "There are other plans for the site.
"By 2008 there will be something there, possibly a theatre or exhibition site. There are other regeneration sites in the city."
The redevelopment of Paradise Street, an £800m complex of shops and hotels, was cited as one of these projects, along with a new arena at the King's Dock, new exhibition spaces, conference facilities and a cruise liner terminal.
A plan to move Everton's ground at Goodison Park to a new 55,000 seater stadium on Liverpool's waterfront was abandoned last year, after the club failed to raise its share of the capital.
Members of the scrutiny panel set up to work out what went wrong with the Fourth Grace scheme are due to report their findings on 1 October.
Architect Will Alsop's design for the Fourth Grace was earmarked for the site near the current Three Graces, namely the Liver Building, with its famous Liver birds, the Cunard and the Port of Liverpool buildings.
The project was central to the regeneration of the area, billed as a "fantastic opportunity" to reinvent the city by Mike Shields of the North West Development Agency (NWDA) when it was launched.
"The development will not only be a significant factor in Liverpool's future but also the region as a whole, making a considerable contribution to the economy, creating jobs, boosting investment and encouraging visitors to England's North West," he said.
Alsop's modern vision was a three-tier structure made up of office space, a 107-room hotel and 50,000 sq ft of community facilities, including a bar, restaurant and viewing gallery.
Alsop is also in the process of redesigning large parts of northern England, including Bradford, Barnsley, and Middlesbrough.
"I don't think any other city in Western Europe declined to the same degree as Liverpool," he told the BBC.
"If you take the peak of its history, its extreme wealth and civic pride, all of those things which it had... to fall to such an extent was a scandal."
But plans are already in the pipeline to build a 10,000 sq ft (929 sq m) museum space on the waterfront site.
Dr David Fleming, director of National Museums Liverpool, hopes the work that went into designing the Fourth Grace will not go to waste.
"It's a blow to confidence in Liverpool, but it's better than the scheme falling flat on its face.
"People will realise we're capable of delivering a world-class public building there."
He said he wants to see "some 21st Century high quality architecture which could be designed to fit in with the surroundings of the World Heritage Site."
"That is the challenge that we face at the moment," he said.
"If we get on with it quickly, we can have a building finished by 2008."