Plans for an accommodation centre to house 750 asylum seekers in Oxfordshire are being dropped, say ministers.
Local residents have objected to the Bicester centre
But the government is still looking at using the site near Bicester as an asylum removals centre where occupants are kept locked up.
The news comes after it was revealed last week that plans for a network of 10 rural asylum accommodation centres are to be abandoned.
The Bicester project has already cost £18m, including buying the site.
The Conservatives branded the scheme a "costly failure" which was a "shocking indictment of government policy".
"It is a direct consequence of their shambolic approach to asylum and leaves the government's promise to increase the number of failed asylum seekers being removed in tatters," said shadow home secretary David Davis.
The accommodation centre plan would have included health services and classrooms on the ex-Ministry of Defence site.
Asylum seekers would also have been free to come and go from the centre.
But the proposed removals centre would detain people whose asylum claims have been refused and is likely to be on a smaller scale.
Home Office Minister Tony McNulty said about £8m of the cost of the project so far had been spent on work which would help establish the proposed removal centre.
"It is not a U-turn, it's part of the success of our asylum policy in recent months," he said.
The rate of asylum applications had fallen from almost 6,000 a month at the end of 2001 to a little over 2,000 in recent months, he argued.
And there had been "significant progress" in handling applications efficiently so more than 80% of asylum claims were decided within two months, he said.
The Home Office's new five-year strategy for immigration and asylum includes more fast-tracking of claims.
The use of removal centres is central to plans to try to keep closer control of the entire process.
Dionne Arrowsmith, from the Bicester Action Group, said: "In the early days we the local community were regarded as racists and Nimbys.
"But even then the welfare organisations, all of the refugee groups were not in support of rural accommodation centres of this size and scale."
Banbury Conservative MP Tony Baldry, whose constituency includes Bicester, said he was pleased ministers had recognised the area was wholly unsuited for the proposed accommodation centre.
Liberal Democrat home affairs spokesman Mark Oaten also welcomed the announcement, saying the planned accommodation centres lacked both local support and the infrastructure to maintain them.