Brazil's mining giant Cia Vale do Rio Doce said the group, which also comprises U.S. aluminium maker Alcoa, Anglo-Australian BHP Billiton and local firms Votorantim and Camargo Correa, no longer planned to build the Santa Isabel plant.
Now, the consortium hopes to negotiate with the government's electricity market watchdog Aneel the refund of some $40 million in deposits guaranteeing concession rights. CVRD press service provided no further comment.
The 1,087 MW plant on the Araguaia river that was supposed to start working in 2009 after an estimated investment of $800 million, is the biggest hydroelectric project of 35 licensed in Brazil in the past three years.
The group bought the concession in 2001, as the companies, which produce aluminium and other metals in a process that requires a lot of electric power, sought their own power generation in order to avoid future power supply problems in Brazil.
Environmentalists said the project would have flooded 93 square miles (240 square km) of land including a number of archeological sites, threatened rare river dolphins and turtles and 20 fish species found only on the Araguaia, harmed wetlands ecosystems and displaced 6,800 people.
But the government's environmental agency Ibama demanded that the Araguaia be left completely intact by the new plant.
"It's the first concrete sign that the new Brazilian government of Luiz Inacio Lula da Silva will demand that new dams meet more rigid environmental and social standards," Glenn Switkes of International Rivers Network that works to protect endangered river systems, said in a statement.
The statement said a number of other projects, including one by Alcoa and Billiton, were tied up in licensing difficulties. Officials with both companies declined comment.
Starting from next year, all new hydroelectric concessions will be offered only after Ibama's approval.
Brazil's power sector has an excess of electricity as Brazilians stuck to conservation habits after the end of rationing, but experts are warning the country needs to build new plants, be it hydroelectric or gas-fired, to provide for economic growth and preempt shortages in the future.
Apart from environmental licensing, a lack of clear regulations for the sector scares off investors. The government is expected to come up with a new set of rules in July.