The city council today insisted that no final decision had been made on whether to go ahead with line 1b between Roseburn and Granton, but sources close to the project say it is now a "non-starter".
It comes as figures obtained by the Evening News show that the city council has so far banked just 3m of the 25m it planned to raise from developers' contributions for the first part of the project. Just 300,000 has been raised for line 1b.
A council source admitted that the economic downturn, coupled with fears that the cost of the main 512m project would soar, meant the 1b spur would be scrapped.
It is understood senior councillors had been summoned to a meeting with the local authority's chief executive following the resignation of tram boss Willie Gallagher last week, where they were asked to make up their minds about the future of line 1b by the start of next month.
But he added: "Nothing that happens in two weeks will change the financial situation. They were never going to have the money. The chickens have come home to roost and now line 1b will not be going ahead."
Another unnamed source said that while a "formal" decision had yet to be made, the final cost of line 1a was likely to "go north", sounding the death knell for the extension.
A total of 545m has been set aside for the trams project, with 500m coming from Transport Scotland and the remainder from the city council. The 1b spur was originally put on hold when the tram scheme was scaled back in 2006. However, TIE has secured a fixed price of 87m to build the line – if it can commit to the project before next spring.
City council leader Jenny Dawe today insisted that the spur line was not dead, and that a working group was currently exploring costs and funding for the project.
She said: "There is no point in speculating on rumour or innuendo. No decision regarding 1b requires to be taken until well into 2009. A working group is currently exploring the capital costs and funding options for delivering line 1b.
"The tram project continues to progress as planned. Our ambition remains to have a fully integrated transport system operational in Edinburgh in 2011."
Last week it emerged that tram chiefs are facing a battle to keep the project on schedule and expect a legal wrangle over inevitable cost rises.
The timetable for delivering the line by 2011 has already slipped, with work at the trams depot at Gogar in particular causing a headache.
TIE is confident of making up the lost time, although it is braced for the unavoidable rise in costs that will result, and disputes with contractors over who is responsible for the extra spending.
Mr Gallagher stepped down as TIE's executive chairman last week, citing family reasons for his departure.
The resignation is said to have come as a "bolt from the blue" for council leaders, and came just weeks after Neil Renilson announced his decision to retire from his position as chief executive of Transport Edinburgh Limited and Lothian Buses at the end of the year.
The decision not to shut Princes Street – which would have allowed the tram work to press ahead faster – and the effects of the global economic slowdown are understood to have put a strain on TIE's budget.
Shirley-Anne Somerville, SNP MSP for the Lothians, said pressing ahead with line 1b would be "sheer lunacy".
She said: "Residents of Edinburgh will breathe a sigh of relief to hear that common sense has finally prevailed.
"I hope that all efforts will now be concentrated on finishing line 1a efficiently, with minimum disruption to all the hard-pressed local residents, businesses and commuters whose lives have been blighted by the chaos for so long."
Mark McInnes, the city's Tory transport spokesman, said: "I think it's probably the right decision and the least risky one in terms of the council's ability to raise money through developers' contributions. I think not going beyond line 1a at this point is sensible."
Roadworks blamed as bus chiefs reveal cuts
All change for the following services . .
FULL details of fresh cuts to Lothian Buses services have been revealed, with bus bosses blaming "city-wide roadworks" and the economic downturn for the move.
Five more routes are set to be withdrawn or cut back, with frequency reduced on nine more services.
The plans will be submitted to the Traffic Commissioner tomorrow and will be discussed with the city council next week.
The council is proposing to spend 26,400 to save one of the under-threat routes, the X48 to Ratho, for the next few months. It says withdrawing it could "isolate" the community.
The news follows Lothian Buses' decision to cut 11 routes last month.
Passenger numbers have been badly hit by tram works and other roadworks, and are down seven per cent on last year.
Ian Craig, the company's managing director said: "We are disappointed to be proposing these changes, but it is a necessary response to falling passenger numbers caused by a combination of tough economic conditions and city-wide roadworks – the end result of which is a pressing need to further reduce loss-making operations."
He said the firm would try to minimise the effect on customers, and the vast majority would be able to access alternative services.
Among the buses to be cut are the X48, which will only operate during peak periods. The Ratho to Ingliston part is being completely withdrawn. The council says this will have a "major impact" on users, as there are no other buses connecting Ratho with the city centre.
Dave Henderson, the director of city development, said: "The most severe impact is undoubtedly the loss of the X48 service to Ratho.
"This community is isolated from the main road network and the X48 provides the only bus link to the city centre."
He said the complete withdrawal of the 17, which serves the Waterfront, would also have an impact on customers.
The X12, which serves Gogarburn and Leith Links, is also due to be withdrawn. Nine bus routes will now run less frequently, including the 22, which covers part of the planned tram route.
Cllr Phil Wheeler, the city's transport leader, said the authority would be working with Lothian Buses to minimise the impact of the cuts.