English Heritage said it is very disappointed plans for a 2.1km bored tunnel taking traffic away from Stonehenge have been shelved.
Tories claim the site "has been left in limbo for a decade".
The announcement, made in a parliamentary statement, concluded the £540m for the proposed tunnel scheme could not be justified.
English Heritage said it was encouraged the setting of the stones and a visitor centre were still a priority.
The cost of the 2.1km-long (1.3 mile) scheme had soared from £223m.
Transport Minister Tom Harris said allocating such sums "cannot be justified and would not represent best use of taxpayers' money".
In a parliamentary written answer, Mr Harris said a review of the Stonehenge improvement plan - which had been the subject of a public inquiry - had identified a shortlist of possible options, including routes to the north and south of Stonehenge.
"After careful consideration, we have now concluded that, due to significant environmental constraints across the whole of the World Heritage Site, there are no acceptable alternatives to the 2.1km bored tunnel scheme.
"The government recognises the importance of the A303 Stonehenge improvement scheme and that the announcement would come as a considerable disappointment for the project's supporters."
He said the Highways Agency would investigate possible small-scale improvements to the A303 as part of its overall stewardship of the route.
The tunnel scheme was deemed the best alternative scheme for an area which suffers major traffic hold-ups.
The decision was welcomed by the Save Stonehenge organisation.
Spokesman Chris Woodford said that only a 1.3-mile section of the proposed 7.7-mile route would have been underground and that the decision "was the only sensible outcome".
"Christmas has come early for Stonehenge. No-one with any sense wanted a tunnel, a flyover, a dual carriageway, and two whacking great interchanges here.
"It's just not acceptable to build 1950s-style motorways in places like this anymore," he said.
Denise Carlo, of the Campaign for Better Transport (formerly Transport 2000), said: "We've been saying for years that the plan to build a tunnel and road through the Stonehenge World Heritage Site would be an environmental and financial disaster."
But shadow transport secretary Theresa Villiers said: "Stonehenge's World Heritage status will be in jeopardy if this problem remains unsolved."
Ms Villiers said the United Nations' cultural arm Unesco had called on the government in July to explain its lack of progress on the scheme, which was announced in 1998.
"Why has this government taken 10 years only to come back to square one? This is one of the most notorious traffic bottlenecks in the country, it impacts on great swathes of the south west who will feel betrayed by this announcement.
"One of our greatest cultural icons has been left in limbo for a decade as a result of this government's total inability to make a decision or deliver on their very clear promises."