Scotland and Ireland say they will play their own league next year following a row with Celtic League partners Wales.
The Irish and Scots were furious at Welsh plans to enter the Ospreys, Scarlets, Blues, and Dragons in a revamped Powergen Cup next season.
The Welsh Rugby Union were told of the move by their Irish and Scottish counterparts at a meeting in London.
It is understood that Italy have rejected proposals to replace Welsh teams in the Celtic League.
The Irish and Scottish unions hope Italy and Wales can be brought into a new tournament with them for the 2006/7 season.
As an addition to the league, Ireland and Scotland had been keen on a new 24-team Rainbow Cup competition including sides from South Africa and Italy for next year.
But Wales prefer the option of their four sides entering a money-spinning, revamped Powergen Cup alongside the top 12 English teams.
The IRFU has criticised the WRU for failing to "consult its partners" prior to committing to the Anglo-Welsh Cup.
"The Scottish and Irish rugby unions are disappointed given the serious negative consequences it has on the Celtic League," said an IRFU spokesman.
"It is hoped that discussions will continue between the Irish, Scottish and Welsh rugby unions, along with the Italian Rugby Federation.
"The aim of this would be to structure a new competition for season 2006-07."
"This would incorporate four Irish teams, three Scottish teams, four Italian teams and four Welsh teams."
"The decision by Ireland and Scotland smacks of childishness and I can't understand it," said WRU group chief executive David Moffett.
"We told them that we had signed up to the Anglo-Welsh Cup, but also that the Celtic League was our most important competition and that we remain totally committed to it.
"Whether Italy came in and we played the league home or away, or they stayed out and it remained home and away, we felt we could accommodate the cup tournament.
"You have to feel sorry for Irish and Scottish rugby supporters.
"Given the state of their rugby on and off the field, I'd have thought Scotland would do everything in their power to play in a meaningful tournament.
"This seems a final decision from them over the Anglo-Welsh issue, but I'm always hopeful and we'll see what happens in the next few days."
The Irish Rugby Football Union said they were "disappointed" with the outcome.
It said: "The Scottish and Irish rugby unions are disappointed that the WRU did not consult its partners in the Celtic League prior to making commitments to the Anglo-Welsh Cup, given the serious negative consequences it has on the Celtic League."