The Ferodo site is just outside the town of Caernarfon
Controversial plans for a prison on the outskirts of Caernarfon in Gwynedd have been withdrawn by the UK government.
Prisons Minister Maria Eagle said there were potential issues with the site, at a former car components plant best known as Ferodo, and later as Dynamex.
She said it had been decided it was "not suitable for prison development".
The proposal had drawn both support and opposition, and ministers say they will try to identify "any potential new sites in Wales".
Politicians had claimed the development would create 700 jobs, and be worth £10m a year to the local economy.
"After careful consideration, the Ministry of Justice has decided to withdraw its interest in acquiring the former Dynamex site (Ferodo) near Caernarfon," said Ms Eagle.
"We have a responsibility to ensure we get best value for the taxpayer," she added.
"As part of our new site search process, which we intend to be open and consultative, we will work with the Wales Office, Welsh Assembly Government and others to identify any potential new sites in Wales.
She added that the decision to withdraw from Caernarfon did not affect plans to sell the site of the former police training college at Cwmbran in south Wales nor the commitment to provide 96,000 prison places by 2014.
The site was named as the chosen site for a prison in Wales in February this year.
Whilst making the announcement the then Prisons Minister David Hanson said the decision had taken into account comments from the consultation, demand for prison places, site characteristics, location, planning police, and the views of the local planning authority.
Bluefield Land Caernarfon, which owns the site said it was extremely disappointed. The company said it had suggested to the Ministry of Justice at the beginning of the year that no announcement should be made until a price had been agreed.
Bluefield said the independent value of the site was given to the ministry before the original announcement in February. The company said that since then there had been no negotiations between itself and the ministry.
A spokesman for Welsh Secretary Peter Hain said he was bitterly disappointed, and is still committed to the campaign for a prison in North Wales.
Local Plaid Cymru MP Hywel Williams also said he was disappointed at the withdrawal of interest at the site.
Parents looking for a nursery for their children would, with plenty of choice around as there is, probably think twice about sending them here with a prison over the road
Rhian Ackers, nursery owner
Others have welcomed the news, however, including local people who would have lived and worked near the site.
Rhian Ackers, who runs a children's nursery over the road, said she was extremely happy the prison was not coming.
"I just didn't fancy having it over the road from us," she said.
She said she was concerned the proximity of the prison would have affected her business.
"Parents looking for a nursery for their children would, with plenty of choice around as there is, probably think twice about sending them here with a prison over the road," she said.
Mrs Ackers would like the site to be developed for use for local people, and possibly a development of affordable housing.
The mayor of Caernarfon, Hywel Roberts, said he had "mixed feelings" about the decision, amid divided views.
"Some were strongly opposed and others were strongly in favour. But the majority were, like myself, somewhere in the middle waiting for some firm details to come out."
Mr Roberts said he had "grave reservations" about a prison in "such a lovely location", but he supported the need for a prison of "reasonable size" to meet the needs of prisoners from north Wales.
"I understand that the ministry is looking for a site for some 1,500 prisoners and such a development would have been completely inappropriate in that location," he added.
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