Leading Plaid Cymru figure Cynog Dafis has accused Culture Minister Rhodri Glyn Thomas of "betraying" a pledge to set up a Welsh language newspaper.
The company behind Y Byd said available funds were 'insufficient'
The former MP and AM is one of a number of Plaid voices to attack the move not to give more funds to Y Byd.
Its founders said a £200,000 annual grant over three years was too low.
But Mr Thomas said the Labour-Plaid coalition had honoured its commitment, with more than £1m to be invested in the sector over the next three years.
Mr Dafis and a number of other long-standing Plaid supporters have written to Mr Thomas, accusing him of "betraying a manifesto commitment" to establish a Welsh-language daily.
Plaid's former culture spokesman Owen John Thomas told BBC Wales' Dragon's Eye that his party's ministers should heed the warning from disappointed grassroots members.
However, Presiding Officer Dafydd Elis Thomas said it paved the way for new ways of daily news in Welsh, with its future on the internet.
"If some people did believe that there was a way for a national government to give money to a single newspaper, to be published in print, being subsidised by government adverts - if they believed that was ethically possible in terms of the standards of public life then they are living, as we say in the north, in cuckoo land," said Lord Elis Thomas.
Y Byd, with its office in Machynlleth, was first unveiled last June when the company said it would print the first copy on St David's Day this year.
Five thousand subscribers were being sought for the publication, which was to cover Welsh, UK and international news.
However, in November the company announced that it was reviewing the timetable for the launch.
It said the move was prompted by the wider review of the Welsh language press by the minister and the Welsh Language Board.
The report concluded there was evidence of interest, but it also concluded not enough people would buy Y Byd to make it viable.