Margaret Thatcher was secretly urged to consider abandoning Liverpool to a fate of "managed decline" after the Toxteth riots in 1981, official papers reveal.
Government files released under the 30-year rule show senior Tory ministers urged her not to spend public money on the "stony ground" of Merseyside.
The then prime minister's Chancellor Sir Geoffrey Howe said it would be like "trying to make water flow uphill".
The riots in Toxteth, Liverpool, on 3 July, triggered unrest across England.
Mrs Thatcher responded by dispatching Environment Secretary Michael Heseltine to Liverpool as "minister for Merseyside" to lead a programme of urban regeneration.
But behind the scenes in Whitehall, other senior figures were soon casting doubt on Mr Heseltine's ambitious plans, files reveal.
Sir Geoffrey wrote to Mrs Thatcher warning of the need "not to overcommit scarce resources to Liverpool", saying that he feared Merseyside was "going to be much the hardest nut to crack".
"We do not want to find ourselves concentrating all the limited cash that may have to be made available into Liverpool and having nothing left for possibly more promising areas such as the West Midlands or, even, the North East," his letter said.
"It would be even more regrettable if some of the brighter ideas for renewing economic activity were to be sown only on relatively stony ground on the banks of the Mersey.
"I cannot help feeling that the option of managed decline is one which we should not forget altogether. We must not expend all our limited resources in trying to make water flow uphill."
Sir Geoffrey acknowledged the suggestion that the city could be left to a "managed decline" was potentially explosive.
"This is not a term for use, even privately," he warned Mrs Thatcher. "It is much too negative."
The head of the No 10 policy unit, John Hoskyns, also questioned the wisdom of sending Mr Heseltine to Liverpool, suggesting it was little more than a "political gesture".
"The automatic assumption within Whitehall and in the country will be that such a minister, if he is to be seen taking action - which is, after all, his political raison d'etre - must be seen to spend money," he wrote.
"This money is likely to be money wasted. Neither the chosen minister nor Whitehall as a whole, will have much idea of how to tackle the real problem-solving task, as distinct from the (important) political gesture."
Mr Heseltine, who was pressing for an annual budget of £100m, had insisted that he needed real powers to act.
"There is no point in thinking for one moment that the exercise would be anything other than a disaster if I was not empowered to take real decisions on my own responsibility whilst I am there," he had informed Mrs Thatcher.
"Without the announcement that some extra resources will be available I am sure that the government's commitment will lack credibility."
But when ministers met that September to discuss his proposals, the Treasury said it would "impossible" to fix a sum in advance without seeing exactly how the money would be spent.