Funding for a new Institute for Web Science, set up with a £30m grant from the department for Business, Innovation and Skills (Bis) has been cut.
The collaboration between the Universities of Oxford and Southampton, announced in March 2010, was led by web creator Sir Tim Berners-Lee and Professor Nigel Shadbolt.
Both are also leading the government's open data project data.gov.uk.
BIS said it was a "low priority" as it announced its efficiency savings.
The cut is part of Chancellor George Osborne's plans to make £6.2bn savings in order to reduce the budget deficit.
A spokesperson from Bis said that the government remained committed to investing in internet technology research elsewhere but that it "cannot support" the creation of the institute in the current economic climate.
"The research councils are investing £117m in a Digital Economy Programme to help drive research in this area and more than £30m is being invested specific projects relating to the semantic web," he said.
The institute was intended to study and shape the future of the web, including the development of semantic web technology, designed to make the internet more intelligent in terms of what people expect from it when they look for information online.
It had also hoped to create spin-off companies and build links with existing businesses to commercialise its work.
Professor Nigel Shadbolt told BBC News the team was "obviously disappointed" by the news.
"However, we do understand that immediate decisions had to be made about what not to start, pending a wider review of priorities in the Spending Review and the development of a fuller business case."
In a joint statement with Sir Tim Berners-Lee the two project leaders said that the future for web science "remains bright".
They were also upbeat about the data.gov.uk initiative, which involves making government data accessible to the public.
"Our understanding is that the data.gov.uk portal will in fact grow significantly in the months to come. As we enter a phase of cutting back on many things, the linked open data movement is a crucial tool, for government, public and industry to get the most value from the important resources being opened up.
"During times of austerity, transparency is essential, and open data will play a crucial role."