Shawfair Developments - originally set up as a joint venture between the city council, Midlothian Council and Miller Developments - was behind plans for a new town of 5000 homes, schools, offices, parks and an industrial estate at the former Monktonhall Colliery in Midlothian.
But the company's board has now agreed that it will be voluntarily dissolved, two years after the project was plunged into crisis when Miller pulled out of the scheme.
Both councils have now launched talks about selling off their hundreds of acres of land assets to other landowners in the area, which include developer Buccleuch Estates and housebuilder Mactaggart and Mickel. The developers would then look to take forward individual elements of the scheme themselves.
Any land deals are likely to include a one-off payment - which will boost both councils' finances in the tough financial climate - and a future share of any profits that come from the land.
Council chiefs will hope an agreement on a future share of profits will protect the authorities from getting a lower price for their share in the current economic downturn, where land values have plummeted.
The city's economic development leader Councillor Tom Buchanan said: "It is obviously disappointing that this development has not occurred to date. Shawfair Developments, along with a range of public and private sector developers, had a model for expansion and growth that was based on a continued upward land value and that did not happen after September 2008. "Also the aspirations of the city council and Midlothian Council are slightly different so it makes sense to say that if both councils can get what they want from their sites then they can do that."
Midlothian Council has not yet finalised what it wants to happen with its assets, although it is thought to prefer medical developments and housing.
Edinburgh and Midlothian Councils initially bought 500 acres of land in the early 1990s and originally aimed to create the new community of Shawfair by 2010. The Shawfair masterplan included three housing areas, with 3500 homes at Shawfair, 490 at Danderhall and 810 at Greendykes.But the plans were hit by a series of delays before Miller decided in early 2009 that it was not viable and exercised a get-out clause.
In a council report published today the city council's director of city development Dave Anderson said: "Negotiations continue with Midlothian Council and other landowners to unlock development at Shawfair."