Opponents of plans to create a single Welsh police force have welcomed confirmation that a merger is off.
The UK government had said the four Welsh forces were too small
Prime Minister Tony Blair said the mergers were "not off the agenda" but it was "not sensible" to force them on police in Wales and England.
All four Welsh police authorities had opposed the idea over issues such as funding and community policing.
North Wales chief constable Richard Brunstrom said he had repeatedly warned of the plans' financial implications.
The all-Wales police force was proposed under former Home Secretary Charles Clarke.
At the time, the UK government said that Welsh forces - all with under 4,000 officers - were too small to deal with issues such as major crime and terrorism as effectively as their larger counterparts.
There had been claims the plan was under-funded, would be expensive and an all-Wales force would divert resources from neighbourhood policing.
Mr Brunstrom said: "We understand from media sources that the Home Office now accept that their current plans to merge the four Welsh forces are untenable.
"We have been repeating over the course of many months that their proposals have had serious financial implications which had to be addressed.
"The challenges of providing protective services such as combating serious and organised crime and investigating major crime remain.
"In the coming weeks we will be discussing the best ways of closing the gaps which have been identified and will undoubtedly build upon the collaboration arrangements which already exist in Wales and elsewhere.
"Financial requirements associated with this work remain unaddressed.
"The cost of preparing for the proposed merger is currently in excess of £1m which has come out of existing force budgets."
Ian Roberts, chair of the North Wales Police Authority, said it was a "victory for common sense".
Mr Roberts said the plan had caused "widespread anger and protest".
He called the merger a "disastrous idea" that would have "destroyed neighbourhood policing".
"We never believed it was necessary to dismantle the police service to achieve improvement of the protective services," he said.
"Local policing should remain under the control of local police forces."
Conservative shadow Welsh secretary Cheryl Gillan said it was a "hugely embarrassing climbdown by the government".
She said: "This has been a deeply unsettling period for policing in Wales which has undermined relations between the four forces, police authorities and the Government."
Plaid Cymru parliamentary leader Elfyn Llwyd welcomed the U-turn, but said the Home Office had handled the issue in a "shambolic" way.
"Are we now to believe that terrorism is no longer a threat, or were we misled from the beginning?" said Mr Llwyd.
"If it is true that the plans have been scrapped because the Government can not afford the financial costs, then that is a matter of great concern in the face of potential terror attacks."
Mike German, leader of the Liberal Democrats in the assembly, said: "Money, time and lots of energy has been spent on this project which could have been more constructively used to focus on local policing".