Henry Boot Developments has abandoned plans for a retail scheme on Curzon Street due to insufficient demand from occupiers in the scheme.
The local authority said that lack of demand was partly caused by rival space appearing due to retailers closing down elsewhere in the town.
The 173,000 sq ft scheme was granted consent in April 2011 and was due to be anchored by Next and Primark.
Steve Rumbelow, Burnley Council's chief executive, said in a statement: "This is very disappointing but it's a result of circumstances outside our control. It just reflects what is happening in the economy across the whole country.
"Retailers have made a commercial decision. At the same time, we should be clear that a range of companies are still showing their commitment to expand their business in Burnley. This reflects their continued faith in this town as a vibrant shopping centre.
"We've been working with Henry Boot for some years on these plans. We've both done all we can to make the scheme work, but it has not been possible to finalise it. We would like to thank Henry Boot for all the work they have done and the investment they have made in time and money in trying to bring this about."
Rumbelow said talks are ongoing with Addington Capital, the new owner of Charter Walk shopping centre, to improve the retail offer in Burnley. "Addington Capital, asset manager, has ambitious plans for Charter Walk with the first phase of works to go on site in the summer. We are working with them to strengthen the retail offer still further."
Matthew Allen, from Addington, said: "We have the opportunity to build on the success of Charter Walk shopping centre. We will be working with the council to develop it further in the coming months."
No one from Henry Boot was available for comment.